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The US dollar is up 18%—here’s why that’s actually bad news for investors

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Over the past year, the dollar has been on a tear: The U.S. Dollar Index, which measures the dollar’s strength against a basket of foreign currencies, is up 18%.

For tourists, a strong dollar is great news. It means you get more for your money abroad.

But for investors, a beefed-up buck is decidedly bad news.

“When the dollar strengthens, that means foreign revenues are going to translate into fewer dollars. Those earnings are going to come in lower,” says Sam Stovall, chief investment strategist at CFRA Research, adding that any overseas investment you own “is going to hurt you in a rising dollar environment.”

Here’s why investing experts say a strong dollar could hurt your portfolio, and what you can potentially do about it.

How a strong dollar hurts your portfolio

A strong dollar crimps income that companies earn abroad, since money brought in in the form of weaker foreign currencies is converted into fewer dollars.

The effect on your portfolio is directly related to your international exposure, which could be greater than you think. About 30% of revenues in the S&P 500 — a barometer for the broad U.S. stock market — come in from overseas, analysts at investing firm Evercore report.

If you own a collection of international stocks — a commonly recommended way to diversify your portfolio — the drag on performance is even more apparent.

“U.S. investors who own international equities get punished by the strong dollar because they’re not getting the benefits of a local market,” says Todd Rosenbluth, head of research at investing analytics firm VettaFi. “The dollar has significantly weakened the performance of international strategies this year.”

Case in point: The MSCI EAFE Index, a benchmark for stocks from developed foreign countries, has surrendered more than 20% so far in 2022. A version of the index that strips out the effects of currency fluctuations has lost about 7.5%.

How to adjust your portfolio for a strong dollar

As with any short-term development in the market, advisors recommend against making wholesale changes to your portfolio or straying from your long-term investing plans. But if you’re looking to take action now against the effects of the strengthening dollar, experts say you can make a few tweaks to your portfolio.

Among your U.S. stock holdings, shifting your allocation toward small- or midsize-company stocks can lower your exposure to the multinational corporations for which the dollar represents the biggest drag.

You may also want to consider bolstering your holdings in sectors of the economy less likely to rake in profits from overseas, Rosenbluth says. “Sectors like utilities and real estate tend to tend to have the majority, if not all, of their revenues stemming from the U.S., whereas staples and health-care companies are more multinational.”

As for your foreign holdings, you can buy funds that follow “currency-hedged” versions of international stock indexes. The managers of these funds trade derivatives to remove the effects of currency fluctuations from the returns of the underlying stocks.

“It allows you to focus solely on the performance of the individual companies in the fund,” says Rosenbluth.

These funds will tend to lead their unhedged counterparts during periods of dollar strength and lag behind during periods of dollar weakness, but over long stretches, the return you earn from a hedged versus an unhedged product tends to be relatively similar, a 2020 analysis from Morningstar found.

A few other nuances separate hedged and unhedged funds, and the decision to hold either is ultimately a matter of preference, says Rosenbluth.

But don’t buy one or the other in an effort to time currency fluctuations for short-term gains, he warns: “You’re just as unqualified as I am in projecting whether the dollar will continue to strengthen over the next 12 months.”

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Economy

S&P/TSX up more than 200 points, U.S. markets also higher

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX composite little changed in late-morning trading, U.S. stock markets down

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TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.

The S&P/TSX composite index was up 0.05 of a point at 24,224.95.

In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.

The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.

The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.

The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.

This report by The Canadian Press was first published Oct. 10, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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