Why the Weak Dollar Is Good for Your Investments

Image: Andy Dean Photography (Shutterstock)

As the economy struggles, it’s been a rough month for the U.S. dollar. Our currency may be on track for the weakest month in almost a decade, according to the Wall Street Journal. Two things have caused the recent decline: Our coronavirus outbreak and low interest rates from the Federal Reserve.

As a result, investors have been selling the U.S. dollar and buying other currencies in places with lower levels of infection. While a weak U.S. dollar may be costly when you’re traveling abroad, Money reports it may be a good thing for your investment portfolio—here’s why.

How a weak dollar impacts U.S. stocks

As the U.S. dollar declines, American products become less expensive abroad. This creates more competitive pricing for companies selling products elsewhere. For example, when a U.S. company creates a $2 product and sells it for $1.85 in another country, the cheaper price sparks more demand.

According to Money, some of the companies that will benefit may already be part of your portfolio—like those represented in the S&P 500. The weak dollar may have the biggest impact on U.S. companies doing business abroad, like technology companies, versus companies focused on domestic business—like utilities or telecom companies.

How a weak dollar impacts foreign stocks

There’s more good news: the weak U.S. dollar may also have a positive impact on your portfolio’s foreign investments. When you buy foreign investments, you’re investing in two things—the foreign stock and the foreign currency.

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When you own foreign stocks and the U.S. dollar weakens, you get a boost from the return of owning the foreign currency. This means you earn a profit when the currency gets translated back into U.S. dollars.

What to expect in the future

Unfortunately, no one can predict how the U.S. dollar will fare in the future. But if we keep struggling with coronavirus infections—and government stimulus continues—experts say the U.S. dollar may stay weak for a while.

 

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