The U.S. dollar is hot this week. It’s leading to risks as well as possibilities for investors.
Investors typically want to be cautious when investing in businesses that do business abroad because of their relative worth and the U.S. dollar. Any fluctuations in the value of dollars could have an enormous impact on an organization’s global business, as it may reduce its ability to compete in any market where its currency is less expensive than the dollar.
However, some stocks are known to have a history that has benefited from the rate of growth in dollars. We’ll name names in the future.
Also, we will look at the value of exchange-traded funds directly related to dollars by observing its U.S. Dollar Index (USDX), which measures the worth of the greenback to the value of six critical foreign currencies.
In the same way, we will inform you about which ETFs gain indirectly from the strength of the dollar through betting on weaker currency pairs.
U.S. Dollar: How Strong Is It?
The U.S. Dollar Index started 2022 on a high in an upward trend. From late April until September’s end, the Dixie – as the index is usually referred to into new highs of 20 years ago. U.S. tourists traveling abroad had the most significant benefit. However, this rapid growth in the dollar has strained the profits of U.S. companies with overseas operations.
The dollar began cooling during the last quarter of 2022 as the Federal Reserve hammered rising inflation through interest rate hikes.
As of 2023, the rate of inflation as well as interest rate expectations, has been tossed around and back. The dollar has responded with a similar response. At the beginning of March, the dollar surpassed its highs in November. Just prior to investors’ worries about the security of U.S. banks caused the dollar to reverse sharply.
The USDX has dropped 2.5 percent year-to-date at the time of writing on May 12 and has sunk 1.9 percent over the last 12 months.
In the current economic climate, with the U.S. economic outlook for 2023 still uncertain, the way toward the U.S. dollar could have important implications for trade and inflation, technological stocks, and other fiat currencies such as bitcoin and gold. (BTC).
Why the Dollar’s Value Rises
U.S. investors typically measure the worth of products or services and investment decisions in dollars. The purchasing capacity of a dollar fluctuates over the year. A stronger dollar indicates an increase in its value compared to currencies from around the globe.
Many factors lead to the strength of the dollar within the markets. Over the last year, the Fed has increased rates by eight times until they are currently at a target of between 4.5 percent to 4.75 percent in the hope of reducing the inflation rate. As interest rates increase, the higher demand for dollars comes from international investors looking for the highest yield.
Why? The Federal Reserve Bank of St. Louis states, “If the Fed increases interest rates when other central banks hold or reduce their interest rates, savings’ return is higher for the U.S. than in other nations. With this rate being higher of interest in the U.S., international capital will flow from other nations into the U.S., resulting in an appreciation of the dollar.”
It is also the reserve currency of the world. Investors see it as a security measure during economic uncertainty. Investors who are worried about the worldwide economic recession and the ongoing war in Ukraine as well as the recent bankruptcy of U.S. banks SVB Financial (SIVB), Signature Bank (SBNY), and Silvergate Capital (S.I.) can look for refuge and protection with the dollar.
Additionally, those who sit in the sand and are waiting for a better opportunity to purchase stocks may get an annual interest of 4% or higher on top savings accounts with high yields. These savings accounts are virtually non-risky for deposits exceeding $250,000 for each bank, provided the Federal Deposit Insurance Corporation (FDIC) guarantees the institution.
How Strong Is the Dollar?
The currencies with the highest trading volume that makeup make up the U.S. Dollar Index compares with the strength of the dollar are Euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK) and Swiss franc (CHF).
Investors can also monitor how much the dollar’s strength compares to other currencies.
The dollar’s performance is compared with significant currencies on May 12, 2012:
- EUR/USD: One euro costs $1.09 today compared to $1.04 one year ago.
- USD/JPY: One dollar equals 134.85 Yun, up from 128.26 a year ago.
- USD/CHF: One dollar equals 0.89 Swiss francs, versus 1.00 one year ago.
- GBP/USD USD: One British dollar can now be bought for $1.25. $1.22 one year a long time ago
- USD/CAD: 1 dollar equals C$1.35 today compared to C$1.30 one year ago.
The majority of essential currency pairs in the major currency pairs, the U.S. dollar, gained strength in the last 12 months.
In the future, LPL Financial chief global strategist Quincy Krosby says the dollar’s strength will likely be closely tied to U.S. inflation and interest rates.
“While the Fed remains steadfastly data dependent, the dollar’s course as well remains focused on inflation and the Fed’s monetary response,” Krosby declares.
How the Strong Dollar Impacts Investors
A stronger dollar could be harmful to U.S. companies that do international business. When the U.S. dollar’s value is high, firms lose revenues as they convert their foreign sales to U.S. dollars. Around 40 percent of the S&P 500’s gains come from countries outside the U.S.
DataTrek Research co-founder Nicholas Colas believes that a stronger dollar can make the life of companies in the tech sector, which account for around 58% of their earnings outside of the U.S.
“The dollar tends to fall as rates fall, which helps the profits of offshore business operations. This is particularly important in the tech industry with a large capitalization as it has the most heavily weighted in the index (28 percent) and the only industry earning over half of its revenue in countries outside of the U.S.,” Colas says.
Additionally, the dollar negatively correlates with fiat currencies, including gold and Bitcoin. Even though Bitcoin and the U.S. dollar have rallied during the past year, prices for Bitcoin and gold have dropped.
What Can Investors Do About the Strong Dollar?
John Lynch, chief investment officer for Comerica Wealth Management, warns that investors should not expect any change in the currency shortly.
“We look for the greenback to nudge higher in the months ahead as Fed policy persists and global investors seek higher-yielding opportunities,” Lynch says. Lynch. “This will likely place a temporary headwind on domestic and emerging market equities.”
The good news for investors is that the dollar’s strength will help specific stocks with little international revenues. Bank of America recently screened for S&P 500 stocks which have historically had the strongest correlation with the currency’s strength over the last decade.
Additionally, the numerous opportunities for investors to gain directly from the growing dollar. The Invesco The D.B. U.S. Dollar Index Bullish (UUP) exchange-traded fund is a hedge against U.S. Dollar Index futures contracts. Its purpose is to track the USDX. The UUP includes $1.3 billion of funds under management and can handle over 3.8 million shares per day of trading volume.
Investors looking to take on greater risk to gain positive returns can buy U.S. dollar futures or options contracts directly. Anyone trading these derivatives must know what they do and the dangers involved.
Additionally, investors may indirectly bet against the U.S. dollar by betting against weaker currencies. The ProShares UltraShort Euro (EUO) is an ETF intending to provide 20% of the daily performance of the euro compared to the U.S. dollar. If it loses 1%, for every dollar the fund loses over some time, by way of example, it gains the equivalent of 2%.
The leveraged reverse fund may allow traders to earn a substantial return on their investments in the short term. However, they’re not intended for longer-term investments.
