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How a falling dollar creates portfolio opportunities

The decline of the US dollar was a surprise to those who thought the strength in the US economy would be reflected in the dollar, as this has been the case when the US showed major growth in the past. A new calculus has emerged threatening dollar strength as the US takes on more debt from the pending $6tn budget and while European and Asian economies start their own economic recoveries. Naturally, this would be cause for concern if you’re retired overseas depending on dollar income. A falling dollar means the cost of purchasing the host country’s currency is higher. However, investors worldwide can benefit from a falling dollar depending on their investing strategy; hopefully helping to mitigate the higher living expense when overseas.

The EUR/USD price is $1.219, 4% higher than this time one month ago. The Peso, USD/MXN is 19.91MXN, a 7.7% drop since May 9, 2021. The Chinese Yuan, USD/CNY is 6.37CNY, a drop of 3% since April 1, 2021, and a drop of 11% since March 2020. The US dollar basket index “DXY” that weighs itself against other major currencies has declined 12% since a year ago.

There are many factors likely contributing to the dollar’s decline, including its drop as a reserve currency by other nations and the assumption of higher, coming inflation as a result of higher US federal debt. “The share of US dollar reserves held by central banks fell to 59 percent during the fourth quarter of 2020 — its lowest level in 25 years... the anti-inflationary credibility won at such high cost by the Fed over the past 40 years may now be in question, causing foreign investors to worry that the US will inflate away the value of their Treasury holdings.”^1

For investors with a diversified portfolio, they might benefit from a dollar decline in two ways. First, international stocks and bonds are often non-dollar based, and the currency move would translate into higher earnings. The iShares International Index, “EFA”, which is composed of mostly European developed stocks, has increased 74% since April 2020. The iShares Emerging Markets Index, “EEM” has increased 82% since the same period, which includes Chinese stocks. Secondly, investors holding commodities will likely see total gains in their portfolios. Oil and coffee, the two largest traded commodities, are traded in dollars. With gains in oil due to increasing economic growth, this would put pressure on the dollar by traders trying to keep oil prices low. Invesco Oil Index “DBO” is up 133% since April 2020.

Overweighting your portfolio into international stocks and commodities will reduce dollar exposure and provide for increased portfolio returns. Conservative investors will find this strategy difficult as these asset classes have traditionally been riskier compared with US bonds, which are now subject to inflationary pressures, making this asset class not as safe as traditionally considered.

At Eureka Wealth Management, I help my clients keep their eye on their financial goals while navigating through economic and market developments. I also do financial planning, insurance, and tax/estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.

Weekly dollar index
Weekly dollar index


^1: FT “The demise of the dollar? Reserve currencies in the era of ‘going big’” https://www.ft.com/content/408d4065-f66d-4368-9095-c6a8743b0d01

^2: CNBC “Deficit projected at $2.3 trillion for 2021, not counting additional stimulus, CBO says”