How Falling Dollar Could Make You Rich Profits and how a falling dollar could push stocks upward
For investors in the U.S., the prospect of a falling dollar may sound like the next step toward financial catastrophe. But if you stick with the right investments, you can actually turn a falling dollar into more profits for your portfolio.
How to Understanding the dollar
From your own personal perspective, you have every reason to fear a falling dollar. Because most people in the U.S. earn their salaries in dollars, your purchasing power around the world is tied to the dollar's fortunes. And given how many things we buy that are imported from other countries, a falling dollar means that you'll pay more for many of those things.
For big companies that do business around the world, though, the impact of a falling dollar isn't nearly as one-sided. If a company buys imported goods and sells them solely in the U.S., then its dollar exposure is similar to that of American workers. But if a corporation has business interests and earns revenues abroad, it can actually benefit from a falling dollar -- and investors who pay attention can transform their currency fears into big gains.
To understand how a falling dollar could push stocks upward, you only need to look at the most recent earnings reports from some well-known U.S.-based global companies. Earnings at McDonald's (NYSE: MCD), Coca-Cola (NYSE: KO), and Amazon.com (Nasdaq: AMZN) all took big hits during the second quarter because the dollar was rising in value. As counter intuitive as it may seem, it was strength in the dollar rather than weakness that hurt profits. Conversely, a weaker dollar can actually boost a company's profitability.
Although that might not make sense at first, you'll get it after you think about it more closely. Those companies and others like them do much of their business abroad. Adjusting their prices every day to reflect the latest currency exchange rates is neither practical nor desirable, so many companies simply ride out minor changes in currency values to preserve their competitive position. In particular, even when the dollar strengthens, no one wants to raise prices in foreign-currency terms and risk losing market share to local competitors. Conversely, when the dollar weakens, the company's foreign-currency revenues are worth more in dollar terms, boosting profits.
As the economy has become more global, foreign revenues have become increasingly important for many companies. For instance, take a look at the percentage of revenue that comes from foreign operations at these companies:
Foreign revenue as percentage of total revenue
Source: Capital IQ (a division of Standard and Poor's). Based on latest available quarterly geographical segment data.
Granted, these companies still do a lot of business in the U.S. and thus have significant dollar exposure. But keep in mind that they also measure many of their expenses in dollars -- meaning that as the dollar falls, it gets cheaper to pay the costs of making products and providing services.
There's another set of stocks whose investors will benefit from a falling dollar: those of foreign companies. But again, you might be surprised at which stocks do the best. For most of the names you know best, a falling dollar probably hurts more than it helps.
The reason is simple: a falling dollar means a stronger foreign currency, which hurts a foreign company's profits the same way a strong dollar can potentially hurt a U.S. company's earnings. The impact is offset somewhat by the fact that for U.S. investors, a falling dollar means their shares are worth more in dollars.
Yet investors do even better by buying shares of companies with no U.S. exposure. That way, shareholders benefit from the currency effect while the company's business is unaffected.
