7 Ways to Invest With a Weakening U.S. Dollar | Investing

After a huge two-year run in 2021 and 2022, the U.S. dollar has finally started to cool off in recent weeks. The U.S. Dollar Index is down about 0.3% year to date through May 19 as economic data has softened.

Fortunately for investors, a weaker dollar could create significant investment opportunities. Here are seven ways to invest in a falling dollar:

A weaker dollar can be good news for U.S. companies with international businesses. This is because a weaker dollar means goods and services being purchased with U.S. dollars become more expensive for the consumer, says Stephen Kolano, CFA and managing director of investments at Integrated Partners. “When a company has a lot of sales outside of the U.S., they have to ‘translate’ those sales and earnings back into the reporting currency, which in this case is the U.S. dollar,” he says.

When the U.S. dollar is strong, companies generating international sales effectively earn fewer dollars and generate lower earnings than expected. “The opposite is true if the dollar is weak and earnings translated to dollars can be ‘more dollars’ and help to increase earnings in relation to estimates,” Kolano says.

Qualcomm Inc. (ticker: QCOM), SLB (SLB) and Aflac Inc. (AFL) are three examples of U.S. stocks that generate a sizable portion of total revenue overseas.

Since most commodities traded in international markets are priced in U.S. dollars, a weaker dollar often means higher commodity prices. While the U.S. dollar and international commodities prices have historically had an inverse correlation, that correlation isn’t ironclad. In fact, commodity prices were particularly strong throughout 2022 as the U.S. dollar gained ground. Commodity prices and the U.S. dollar rose in tandem in the 1980s and the 2000s, two similar periods when high inflation spurred interest rate tightening, and spiking goods costs eventually triggered U.S. recessions.

Investors looking to bet on commodities in 2023 can buy popular commodities exchange-traded funds, or ETFs, such as the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC).

Like commodities, gold is generally priced in U.S. dollars. The U.S. dollar is no longer backed by physical gold, but the value of the dollar is one of many factors that affect gold’s value. Gold prices have climbed higher since the beginning of 2021 as investors use the precious metal to hedge against inflation. However, investors also use gold as a stable store of value during periods of currency volatility. To avoid losses tied to a declining U.S. dollar, investors can buy shares of the popular SPDR Gold Shares (GLD) or the more volatile VanEck Gold Miners ETF (GDX).

Investors with the stomach for extreme volatility can invest in Bitcoin (BTC), Ethereum (ETH) and other popular cryptocurrencies to play a weaker dollar. The price of cryptocurrencies is typically denominated in dollars, and many investors see Bitcoin and other cryptos as digital versions of currencies or commodities. In the long term, Bitcoin has been an exceptionally good investment, but its extreme volatility is not for the faint of heart. In fact, Bitcoin has not had a calendar year in which it gained or lost less than 73% in value since 2015, including an 81% price drop in 2022.

In addition to U.S. stocks doing business overseas, international companies with relatively low exposure to the U.S. market also benefit from a weaker dollar.

Investors who want to take an aggressive approach to investing in international stocks can target emerging markets, such as China, India and Brazil.

Doug Carey, the owner and president of WealthTrace, says a weaker dollar is a positive for investors in emerging-market funds.

“The money invested by a U.S. investor into a foreign fund must be converted back to dollars. When it is converted back to dollars, and if the dollar has risen versus the foreign currency, the value of the investment declines in proportion to the increase in the dollar’s value,” Carey says.

The Vanguard FTSE Emerging Markets ETF (VWO) is one of the largest and lowest-cost emerging-market ETFs in the market.

Investors can mitigate risks associated with high-growth emerging markets by focusing on developed markets, such as Europe, Japan and Korea. In addition to protecting against a weaker U.S. dollar, international stocks can diversify your investment portfolio away from U.S. stocks and the U.S. economy. Developed markets won’t provide the type of growth emerging markets will, but their economies are typically more stable and reliable. The Vanguard FTSE Developed Markets ETF (VEA) is a popular fund for diversified exposure to international developed markets. The fund’s top holdings include stocks such as Nestlé SA (NSRGY), ASML Holding NV (ASML) and Samsung Electronics Co. Ltd. (SSNLF).

One of the most straightforward ways to profit from a weaker dollar is to invest in other fiat currencies. Foreign-exchange traders can make bets on currency pairs directly, but there are also publicly traded trusts and funds that allow investors to buy and sell international currencies just like stocks. For example, the Invesco CurrencyShares Euro Currency Trust (FXE) is an easy way to bet on the euro, while the Invesco CurrencyShares Japanese Yen Trust (FXY) provides exposure to the yen.

However, Robert Johnson, a CFA and finance professor at Creighton University’s Heider College of Business, says investors should understand that investing in currencies is a zero-sum game. “That is, when the U.S. dollar strengthens versus the yen, those holding U.S. dollar positions win and those holding yen positions lose an equal and opposite amount. If you want to build wealth over the long term, the stock market is the place to be,” Johnson says.