Hooray for a Weak Dollar!

Dollar sanctity be damned; investors should be excited about the prospect of the U.S. dollar possibly heading toward a prolonged period of weakness. Cha-ching!

Most Americans believe a “STRONG” U.S. Dollar is sacrosanct. Dollar strength is considered a badge of honor reserved for a country who is the envy of the world. It reflects American exceptionalism, financial integrity and dominance, suggesting a rarity of character not found elsewhere. It emotes expensiveness, high class, and quality, and implies the U.S. has captured the highest valuation in the world. It also exudes leadership, stability, and staying power. Finally, a strong dollar ensures that everything in the world is cheap for Americans – only pennies on the dollar.

Although a strong dollar certainly has its benefits, a relentlessly rising or expensive currency also has considerable downside. The U.S. dollar is not only arguably the world’s most important means of exchange, but it also represents a major economic policy. Much like interest rates, monetary growth, or fiscal taxation and spending, the value of the U.S. dollar impacts both future U.S. economic performance and the financial markets.

A strong dollar makes U.S. produced goods and services less competitive by raising their relative costs for both foreign and domestic buyers and thereby encouraging spending to move abroad. A higher dollar makes U.S. goods more expensive for foreign buyers and foreign goods cheaper for domestic buyers. Consequently, similar to monetary or fiscal tightening, other things equal, a strong dollar tends to slow net spending on domestically produced goods and services and thereby also slows, employment, income, and profit growth. Dollar strength also tends to impair the U.S. stock and bond markets. As the dollar rises, foreign stocks and bonds become cheaper and domestic stocks and bonds more expensive encouraging investment flows away from domestic securities.

While a robust dollar provides a sense of U.S. success and makes trips abroad much more affordable, it also curtails domestic real GDP growth and, as shown below, can be quite detrimental for investors. Indeed, rather than cheering for an ever-rising dollar, investors interested in healthy returns should probably be rooting for dollar weakness!