Strong dollar

You’ve probably heard by now that the dollar has strengthened significantly over the last few months. In fact, it is up 18% since last summer and 12.5% for 2014. But what does that mean to you?

  1. If you are planning to travel abroad, your dollars will now buy more products and services than they would have before. For example, a few months ago the Euro/dollar ratio was at 1.37 euro/dollar. A hamburger in Germany might have cost 7 euros, which was a $9.59 hamburger. Today, the exchange rate is 1.06 euro/dollar, so that same hamburger now costs $7.42. That’s a 22% discount from just a few months ago!
  2. In contrast, those traveling from other countries to America have to spend a lot more of their money to buy the same products and services; reverse the above numbers and note that they are now paying 22% more using the above example.
  3. Beyond travel, there are imports and exports to consider:
    • A U.S. company today has a harder time exporting its goods to other countries, meaning they will either stop selling overseas OR they will need to discount the price of the product. This is especially true for durable goods and could hamper the performance of exporting and multinational U.S.-based companies over the next few months.
    • This doesn’t mean, though, that foreign companies exporting to the U.S. will necessarily do well. Even if 100% of their income comes from sales to the U.S., that means that (at current values) their gross sales are down by 22% (in their own currency), so that will definitely diminish their profit margins as well.
  4. We are in a consumption-based economy, and our economy benefits from a rising dollar. Over the last 30 years, when the dollar increased over 10% in a year, the stock market saw a median increase of nearly 15% the next year, but with a decent amount of volatility. Time will tell if this trend repeats itself in 2015.

In the end, sticking to your long-term investment objective is the best way to minimize your own personal risk and maximize your expected return. But, if you were thinking of traveling abroad, now would be a great time to do so!

%d bloggers like this: