One occurrence that has taken place this year has been a strengthening of the U.S. dollar. This typically causes a more challenging environment for American exporters, but tends to be a benefit for consumers.
The effect is most pronounced among commodities that are global in nature. The most obvious is oil, as a stronger dollar lowers the price of oil relative to other currencies. While the price of gasoline has not fallen significantly, it is still lower than if the dollar hadn’t strengthened.
The price of food is also dependent upon currency moves, as there is a global market for certain agricultural products, such as corn and wheat. Clearly weather plays a role in the price of farm commodities, as we saw with the drought in the Midwest last year. With weather more favorable this season, along with a stronger dollar, we would expect to see little if any food inflation this year.
Besides commodities the prices of manufactured goods are also impacted by currency moves. A good example would be the price of automobiles. The Japanese yen has weakened significantly against the dollar this year. Recently Nissan has instituted price cuts across various models, which this currency move allowed them to do.
Looking at the prices of most cars, you will see many are at record levels. However, much of the price increases are due to quality improvements, such as better transmissions, engines and added safety features. Also, many foreign manufacturers assemble automobiles here, though parts are sourced from both the U.S. and overseas for both domestic and international carmakers. This has tended to lessen the impact that currency moves might have had otherwise.
The one area where currency moves will not benefit the consumer is in services. There is virtually no impact on the pricing of education, health care, or repair work based on currency moves. In addition there has been less productivity gains in services versus manufactured goods, which is why inflation has been greater for education and health care.
The stronger dollar has had some impact on U.S. manufacturers, as profit growth has slowed. However, productivity gains have been substantial in recent years for many U.S. corporations. Therefore, most U.S. companies should still remain competitive versus foreign ones, though there will be an impact on profit margins.
From the standpoint of an investor the effects of a stronger dollar are mixed. One positive is lower inflation, which benefits consumers and results in more spending. Another is that more overseas money is invested in the U.S. because of our stronger currency. The negative is lower profits for U.S. multinational companies from overseas activities.
For now, the positives of a stronger dollar have impacted the stock market more than the slower profit growth. There are certainly other factors that have caused the market to move higher this year, besides a stronger dollar, notably that investors appetite for riskier assets has increased.
The stronger dollar has also been a negative for international investing, as the U.S. market has outperformed foreign markets in dollar terms. I would still maintain a portion of stock investments in foreign markets. This provides added diversification, plus many overseas markets should grow faster than the U.S. over time.
Trying to time currency moves is very difficult, which is why I would not recommend trying to change the mix between domestic versus international stocks. Only if you thought this dollar move would continue for a sustained period, would I recommend a change.
It is important to recognize there will be times the domestic market will outperform, and other periods international investing will do better. For most investors maintaining your mix between domestic versus foreign holdings is probably the best course of action