It’s a great time to have dollars in your pocket. Don’t blow it.
Thanks to weakness in Asia and Europe, central banks around the world have pushed rates below zero percent. Meanwhile, the U.S. dollar has regained its stature as the world’s gilded currency — a trend that doesn’t show any signs of weakness.
The U.S. dollar has strengthened 26% against the euro and 44% against the Japanese yen over the past five years, says Oanda. And the dollar’s rise against currencies in less-developed nations has been even more dramatic, including a 50% rise against the Mexican peso.
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Investors might be tempted to make bold moves to double-down on the dollar’s strength. But currency and stock experts caution individual investors from trying to time the infamously wild currency market, which can confound even the pros. “Currencies have the habit of over and under shooting,” says Amo Sahota, chief currency strategist at Klarity FX. “We’re being pulled in all sorts of directions.”
Instead, if the dollar stays strong or even strengthens as many expect, investors are wise to consider the importance of the currency when looking at their money decisions, including:
• Kiss hopes of a commodity bounceback goodbye. Investors trying to time the oil crash for a way to profit need to pay close attention to the dollar. Since oil and many commodities are priced in dollars, strength in the greenback could push oil prices further down or delay the recovery, creating a slippery slope for investors trying to time the oil bounce.
• Beware of multinational exposure. Giant companies that do large percentages of their business outside the U.S. are especially exposed to an uphill battle with the strong dollar. Many large U.S. multinationals have already warned the strong dollar has hurt revenue. Investors looking to avoid the hit to revenue from the strong U.S. dollar might concentrate on companies that are focused domestically. Stocks in the Standard & Poor’s 500 that get 99% or more of their revenue from the U.S. and have S&P Capital IQ’s top five-star ratings include broker Charles Schwab (SCHW), telecom Frontier Communications (FTR), bank Huntington Bancshares (HBAN) and grocery store Kroger (KR). Beware, though, that if the U.S. economy slows even domestic-focused stocks will be hurt, Sahota says.
• Shop until you drop. You could try to profit from the dollar by buying PowerShares DB US Dollar Bullish exchange-traded fund (UUP). The dollar’s strength is likely to continue, Sahota says. But an easier and more fun way to profit is to travel and shop, he says. Skiing trips to Canada, vacations to Mexico and shopping trips to Europe are “a boon to U.S. tourists,” Sahota says. “There are good opportunities,” he says.
Follow Matt Krantz on Twitter @mattkrantz
