For a while now, many observers have warned of impending disaster for the U.S. dollar. But if you get paid in dollars, and buy everything you need with dollars, you might wonder: Does it really matter whether the dollar loses value compared with other currencies?
The simple answer: Yes, it does matter -- for many reasons. Some are obvious, others less so, but each has an impact on a different set of people. Moreover, you'll discover that the dollar's value affects not only your personal finances, but also your investments.
1. The trips you take
If you've ever traveled abroad, you know just how important the dollar's value can be. A strong dollar makes it cheaper to go abroad, while a weak dollar makes everything much more expensive. Conversely, for companies that benefit from foreigners traveling to the U.S., the reverse is true: A weak dollar makes it cheaper for foreign tourists traveling here, while a strong dollar makes the U.S. more expensive.
From an investment standpoint, that means companies that cater to foreign tourists often thrive during weak-dollar periods. Disney's (NYSE: DIS ) U.S. theme parks, for instance, did well during the initial part of the recession, as a weak dollar attracted visitors from abroad. But since Disney has other theme parks around the world, the company has a more diversified currency exposure overall. Casino operator Wynn Resorts (Nasdaq: WYNN ) , on the other hand, has more dollar-specific exposure, with the Chinese yuan currently closely pegged to the dollar. If China changes its currency policy to strengthen the yuan, Wynn's casinos in Macau could well get less attractive, driving Asian gamblers back to its Las Vegas casinos.
2. The products you buy
Most of us buy foreign products all the time. Whether you buy them directly from foreign companies or from U.S. sources, those products' prices fluctuate because of movements in currency values.
It's easy to underestimate just how important the U.S. market is for foreign companies. British drug maker GlaxoSmithKline (NYSE: GSK ) got 36% of its 2009 revenue from the U.S., which isn't that much less than the 47% figure for U.S.-based Abbott Labs. BlackBerry maker Research In Motion (Nasdaq: RIMM ) is Canadian, yet Canadian buyers make up less than 6% of its total revenue. In contrast, the U.S. provides more than 10 times RIM's home-country sales volume.
A weaker dollar can force foreign sellers to raise prices in dollar terms, making them more expensive. So if the price of your favorite imported coffee or chocolate rises the next time you visit your local store, ask yourself why. It may be that the dollar has fallen in comparison to the country from which that product originates.
3. The global economy's impact on you
Like it or not, most people are affected by global economic conditions. Even companies that are still considered true-blue U.S. institutions now make a lot of money from their foreign operations. Coca-Cola (NYSE: KO ) is sold in more than 200 countries around the world, and the company earned less than 20% of its profits during 2009 from its North American operations. Both Europe and Latin America were far more profitable for the beverage company. Similarly, thanks to a concerted effort to promote its brands around the world, Procter & Gamble (NYSE: PG ) got more than half its revenue from foreign operations during its 2009 fiscal year.
Foreign exposure means that these companies' profits fluctuate based on how the dollar performs. A strong dollar makes their foreign profits less valuable in dollar terms, while a weaker dollar improves their results.
4. Foreign investments you own
When you invest abroad, the relative performance of the currency in which your investments are denominated will affect your dollar-based returns. So even if a foreign stock market goes up in local-currency terms, a stronger dollar can more than offset those gains.
Some foreign investments, such as mutual funds, hedge against currency risk. That isn't always a good strategy, though. When the dollar is weak, those hedges will cost you some of your returns. As a result, you lose some of the diversification that foreign investments provide.
5. Direct currency-based investments
Nowadays, you can make direct bets on currencies easily. For instance, if you think the euro will recover from its Grecian troubles and strengthen against the dollar, then the CurrencyShares Euro Trust (NYSE: FXE ) is designed to rise with the euro.
You can find similar ETFs for a variety of currencies, including those of Japan, Australia, Canada, Britain, and China. In addition, if you think the dollar will strengthen, you can find dollar-bull ETFs as well.
Worth your attention
So even if you don't have a big trip planned, it's worth it to pay attention to the currency markets. They have more of an impact on you -- and your portfolio -- than you may realize.