The strengthening dollar is cutting U.S. investors' returns on international stocks and revenue of U.S. companies with a large international presence. But advisers are split on whether the dollar's strength will last and if trimming foreign investments is the right move.
The strengthening dollar is cutting U.S. investors’ returns on international stocks and revenue of U.S. companies with a large international presence. But advisers are split on whether the dollar’s strength will last and if trimming foreign investments is the right move.
For years, the value of Americans’ foreign stock holdings was lifted by gains in those currencies against the dollar.
As the dollar strengthens, U.S.-made goods become more expensive abroad, and those foreign sales are worth less when converted to dollars. Foreign stocks are also worth less unless you invest in a mutual fund that hedges currencies back to dollars.
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The dollar began strengthening in July and has gained about 20 percent as measured by the U.S. Dollar Index. The dollar has tended to move in cycles averaging four-and-a-half years over the past few decades, according to Bespoke Investment Research.
Deutsche Bank strategist Robert J. Froehlich doesn’t believe the dollar’s move higher will last as long as that, but he is advising clients to ease up on international investments. “The rest of the world has to play catch up with lowering interest rates, and that’s more foundation for the dollar to strengthen,” he says. Froehlich believes dollar strength could last nine months to a year. At that point, he expects a ballooning U.S. budget deficit will cause the dollar to depreciate.
Lew Altfest, president of financial advisory firm L.J. Altfest & Co., says he’s more confident in the U.S. than in Europe right now, believing Europe faces tougher economic challenges. He recommends that investors with moderate risk tolerance keep 70 percent in U.S. stocks vs. 30 percent internationally.
Financial adviser Bob Kreitler says long-term investors should stay diversified, and doesn’t believe that reallocating now makes sense, especially within such volatile markets. “This is short-term stuff,” Kreitler says. “The worldwide growth story is intact, and well-run U.S. companies should be successful overseas.”