10 Reasons to Love the Strong Dollar
NEW YORK -- The surge in the greenback has some stock investors screaming foul, but they shouldn't be. Instead, they should embrace the strength.
It is true that the trade-weighted value of the U.S. dollar has climbed more than 21 percent in the last 13 months, according to recent data from the St. Louis Federal Reserve. It's also true that the rally is taking its toll on the earnings reports of some multinational companies -- their foreign revenues take a hit when translated back into dollars.
Still, there is plenty to feel great about. Here are 10 reasons to smile:
1. It makes imports cheaper. A dollar will now buy at least 21 percent more imported stuff. That means retailers can buy more knickknacks for the same money and either lower prices to their customers or increase profit margins. Possibly they can do both. Keep a close eye on stocks of retailers that depend on so-called discretionary spending (items or services you don't have to purchase.) The Vanguard Consumer Discretionary (VCR) exchange-traded fund holds a basket of such stocks.
2. It's good for the housing industry. The raw materials for building homes, like copper and lumber, are both traded in dollars. It takes around 400 pounds of copper (for the electrical circuits) and thousands of feet of lumber to make a standard single-family home. A stronger dollar makes these essential materials cheaper. Lumber and copper prices have both slumped recently and the dip should help homebuilders hold down costs. Watch the SPDR S&P Homebuilders (XHB) ETF, which holds a basket of homebuilding companies.
3. It makes oil cheaper. As with copper and lumber, crude oil is priced in dollars. When the dollar is strong, you get more oil for your money. Eventually, as we have seen, the lower price filters through to lower gasoline prices; for many people, that is like getting a tax cut. It also means people can spend more of their money at retailers, if they choose.
4. It keeps a lid on inflation. By its very definition, inflation is the declining spending power of the dollar. So when the dollar is strong, we have the opposite -- if the greenback isn't declining then we have less inflation.
5. It keeps the dollar at the top of the currency food chain. What central bank wants to hold a currency that is quickly dwindling in value? The fact that the dollar is strong makes it worth holding. That is actually more important than many people realize. Since the end of World War II, the greenback has been the bedrock of the world financial system. This allows the U.S. government to borrow at lower interest rates than it would otherwise be able to, because the dollar and dollar-denominated Treasury securities are a big portion of holdings by foreign countries.
6. It should keep the cost of borrowing lower. Lower than it would have been otherwise, that is. Clearly the Federal Reserve has indicated it will raise the cost of borrowing money sooner or later. But still, with inflation under control and the greenback at the top of the food chain, the pressure to continue raising rates will be less than otherwise.
7. It makes foreign holidays cheaper. If you wanted to go on a romantic trip to Paris, now might be the time. The dollar will now buy you more luxurious dinners than previously.
8. It's great for domestic manufacturers. Companies that primarily sell to U.S. customers won't be harmed by lower foreign revenues, but could be helped by lower costs of dollar denominated materials such as steel. Think about the enormous benefits to machine tool manufacturers supplying bigger multinationals.
9. It makes investing overseas a better value. If you have a billion dollars in the bank burning a hole in your corporate pocket, it will now buy you a bigger company overseas. As I have written previously, M&A activity and stock market gains tend to move in tandem. Who knows, maybe we'll see a cross border merger boom.
10. It might boost the world economy. Since the end of World War II, the U.S. economy has been the locomotive that has pulled the rest of the world along. There has been talk of so-called decoupling with the idea the other economies might be able to grow without the U.S. pulling. Unfortunately, it hasn't really played out that way. Now that the U.S. is growing, albeit slowly, maybe it can help pull Europe and other stagnating economies like Japan along. That will happen by Americans importing lots of things from overseas. Investors might want to take a look at the Vanguard European Stock Index (VEURX) mutual fund, which invests in European securities.