Should Investors Fear a Weaker Dollar?

Analysis and Implications of the Recent Decline in U.S. Purchasing Power

Recent weakness in the U.S. dollar has been one of the most talked about topics in financial markets over the last few months. With all of the chatter surrounding the greenback, it’s important to put the recent move in historical context and evaluate the implications a weaker dollar has on the economy and you – the investor.

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The dollar has weakened sharply in the last year, down about 13% from its peak in 2016. However, this weakness follows a two-year period of tremendous dollar strength. Looking longer-term, the dollar is still above its 10-year average, and certainly within a normal trading range.

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In short, the recent decline is no more than normal currency market fluctuation. Regardless, the direction of the dollar does have far-reaching implications for the economy. We will highlight a few key implications below.

1. Higher Import Prices

A weaker dollar means that goods imported from other countries cost more for U.S. consumers. Whether it is the price of oil or a new tech gadget, a weakening dollar means that these imports cost more. In fact, import prices are up 3.6% from a year ago, partly due to the dollar weakness. Not only does this impact domestic consumers and businesses who are forced to shell out more dollars for foreign goods, but it also raises the potential of increased inflation as these higher import prices flow through to the rest of the economy. 

2. Cheaper Export Prices

While U.S. imports are costlier as a result of the weaker greenback, the converse is also true – U.S. exports are cheaper for foreign buyers. This makes U.S. exports more competitively priced on a global scale and benefits American exporters. This impact is already being felt as U.S. exports are now growing at over 5%.

3. Stronger Foreign Earnings for Multinationals

Additionally, with a weaker dollar foreign earnings from U.S. multinational corporations are worth more when they are translated back to dollars. For instance, when the dollar was at its peak in 2016, a U.S. based company that sold €100 of widgets in Germany would have converted its €100 to $105. Those same €100 of widgets today would be worth roughly $122 due to the Euro strengthening vs. dollar over the last few years. With over 40% of S&P 500 revenue derived from international markets, a weaker dollar is a huge benefit to U.S. corporate earnings. This should be a positive for the U.S. economy and stock market as higher corporate earnings should stimulate economic activity.

In short, recent dollar weakness is nowhere near as unique as the plethora of news stories would lead one to believe. The dollar is still well within its long-term trading range and is in fact still above its 10-year average. The impacts, while real, are not something that should lead to a decrease in economic growth and may be a net positive for the U.S. economy in the short- term.

All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. Source: Bloomberg.

Advisory Services Offered Through Commonwealth Financial Network, a Registered Investment Adviser.