How Does a Weak or Strong Dollar Affect You?
~ By Herb White, MBA, CFP ~
Uncle Joe: “Why should I care if the dollar is strong or weak? I only care how many dollars are in my wallet!”
Nancy: “Uncle Joe, you’ve been following the price of gasoline at the pumps. Shouldn’t you follow how strong or weak the dollar is? After all, the strength of the dollar can affect your investments and also the price you pay for stuff produced in other countries, like computers, cell phones and cars.”
Uncle Joe: “I never thought about it before. Can a weak or strong dollar really affect me?”
It seems that many consumers know everything about the price of gas for their car, but when asked how their dollar is faring compared to other countries’ currencies, they don’t understand the connection. And while most people can’t do anything about the price of gasoline, they do have some control over the dollar on international markets, at least indirectly. Let’s take a look.
You get a good sense of the dollar’s value when you travel to a foreign country that has its own currency and you go to exchange your money to use their currency while visiting. Sometimes the exchange rate leaves you with a lot less in your wallet to spend while visiting. Sometimes more. If you get more, that means the dollar is strong versus that country’s.
You need to realize also that, since so many of the products sold in this country are produced and imported from abroad, the strength of the US dollar can really take a hit when you are making purchases. When the dollar is strong, you won’t see prices of many products affected as much. But a weakened dollar leads to inflation and higher interest rates here at home.
These fluctuations and resulting uncertainty can be significant enough to leave you wondering how to save, or when you should make major purchases. Unless you keep an eye on the dollar and its fluctuations, you can even throw off your retirement plans. Being cautious and getting advice on your investments, which aren’t immune to a gyrating dollar, can be a wise move when every dollar counts.
International investors should be knowledgeable about the tendency for currency risk. That means keeping an eye on the economic strength of the countries in which they are invested. Local political conditions in the country and even some indirect influences such as trade balances may affect your investments and your planning goals.
A currency gain or loss is the result of a rise or fall in the dollar’s value against the currency in which the investment is made. This means you will see increased returns on your investments when the value of the dollar falls compared to the local currency and vice versa.
What can investors do to offset currency risk and potential losses? When you make an investment designed to reduce your risk of adverse price movements in an asset, you are doing what is called hedging against the dollar. You basically have three options, and you should get the advice of a financial professional before proceeding. The first option is not to hedge at all, hoping that currency fluctuations will balance out over a period of time. Investors with significant time before retirement, for instance, are likely to ignore the option to hedge. A second option is to fully hedge, hoping to reduce the volatility of their portfolio. Recently, many investment firms are offering currency services to help clients actively manage hedging, a third option for investors.
But what about Uncle Joe, who has a retirement account but not too many years until he retires? He has already taken the first step by listening to his wise niece. Then he called a financial advisor who helped him learn his options. He may be saving at the pumps these days, but now could also be taking good care of his retirement plans.
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Provided by courtesy of Herb White, MBA, CFP©, a CERTIFIED FINANCIAL PLANNERª with Life Certain Wealth Strategies, 8400 E Prentice Ave, #715 Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor. Insurance Services offered through Life Certain Wealth Strategies, which is not affiliated with Woodbury Financial Services, Inc. Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.