For years, investors have dealt with the effects of a falling dollar. But a recent sharp reversal has brought the dollar back into the spotlight -- and has investors scurrying to get their bearish bets off the table.
In 2000, a euro was worth about $0.82. In seven years, the dollar lost nearly half its value, with the euro rising above $1.60 earlier this year. Since July, though, the U.S. currency has regained a decent chunk of its lost value, and now it costs just $1.40 to buy a euro.
Winners and losers
The dollar's decline accompanied a number of major investing trends that have prevailed in recent years. The rise in commodities prices, especially gold and oil, was far more pronounced against the backdrop of a dropping currency. Some believe that investors actually used commodities as a hedge against the falling dollar; commodities-linked stocks like PotashCorp
Now, though, many of these trends are reversing. Oil has fallen by nearly one-third, to just above $100 per barrel, and natural gas has also dropped sharply, causing companies like ConocoPhillips
Preparing for the future
If the dollar continues to climb, look for several investing themes to grow increasingly important:
- Export reversal. The weaker dollar has made U.S. products more affordable to customers abroad. The resulting climb in exports has played a major role in bolstering the weak economy. If the dollar becomes strong again, however, that support will fall off as exports become less attractive to foreign buyers.
- Value abroad. As the dollar fell, it became increasingly difficult for U.S. investors to buy shares of foreign companies at reasonable prices. Combining falling foreign share prices with a stronger dollar, however, will cause foreign stock values in U.S. dollar terms to drop quickly. That will hurt current shareholders, but it could open the door to new foreign investment.
Multinationals suffer. For years, multinational companies with a substantial presence abroad, such as McDonald's
(NYSE:MCD)and Starbucks (NASDAQ:SBUX), have gotten an extra boost from foreign profits that got translated to dollars. A stronger dollar will devalue revenue from foreign operations, causing growth in dollar terms to slow, even if volumes in local currencies stay stable or grow slightly.
- Restored confidence. Talk of the dollar losing its status as a reserve currency has roiled markets from time to time. A reversal of the lower-dollar trend would help reestablish the dollar as a central currency for global trade, helping to restore confidence in the U.S. economy.
Of course, it's far too early to conclude that the rise in the dollar over the past couple of months is the beginning of a multiyear rebound for the U.S. currency. As with any market, the euro could merely be going through a correction in a continuing bull market, and the dollar could fall back to its recent lows and beyond.
Yet even if it is just a correction, the dollar's latest rise might not be over yet. The dollar could still appreciate substantially from its current levels -- potentially causing more pain for investors who've made big profits by betting against the dollar in recent years, but rewarding those who can shift their thinking to adapt to new trends.
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