It seems that the declining dollar has captured the attention of a lot of investors recently, and many are looking for ways to offset perceived damage from a weak U.S. greenback. But a weak dollar does benefit some investments, and you may already be hedged more than you think.
Part of the problem is a possible misunderstanding about the implications of a weak dollar. Since "strong" sounds better than "weak," many believe we should insist on a strong dollar. However, any basic international finance class will point out a weak or strong currency is not good or bad. It just represents a different set of domestic economic winners and losers. For example, a strong dollar may benefit companies that import goods from abroad, consumers who purchase those imported goods and U.S. travelers overseas. However, a weak dollar benefits domestic exporters, profits from abroad, commodities and tourism.
A weak dollar benefits U.S. companies that export goods to other countries because it takes less foreign currency to buy the same amount of dollars, which translates to cheaper relative prices for U.S. goods in the global market. This explains why China has worked so hard to keep its own currency so weak relative to the U.S. dollar. In fact, many countries have pursued a weak currency — on purpose — in an attempt to benefit their export industries because it helps them keep their prices low in the U.S.
The large decline in the dollar has certainly given U.S. manufactures that export abroad a tailwind that has aided in their recovery and made them more competitive globally. Investors in these companies may see a benefit through increased demand.
The weak dollar also makes the U.S. an attractive destination for foreign travelers and that benefits many companies that cater to these tourists. Businesses like tour companies, hotels, airlines, souvenir venders, live theater and restaurants are among those who can get a lift from foreign money spent here.
Investors can also benefit from domestic companies, which derive profits from foreign operations, as well as from international stocks and mutual funds. This is because those foreign profits, denominated in another currency, must be converted to dollars.
