The reason why the dollar is declining is a very complicated with numerous factors going on. But a large one is the U.S. Trade deficit. We are importaing a whole lot more than we are exporting, especially from countries like China. When more dollars are floating around, they're worthless. The budget deficit doesn't help either and means many foreign investors are holding U.S currency. And we just had an interest-rate cut, which makes our cash accounts, like money market funds, less attractive.
What does this mean for the U.S. Economy? A falling dollar isn't necessarily a bad thing, particularly if the decline is orderly, slow. It makes our goods and services more competitive abroad. We've seen a lot of discussion of this during the current earning season - big, multi-nationals that operate in other countries are benefiting from that. It also means that more foreigners are visiting here and they can come to America on the cheap. So that can help our service industry.
For consumers, is can mean that we pay more for foreign goods that are shipped to the U.S. So you may pay more for European wine, or cars. That can give US companies that compete with foreign ones an edge here in the U.S. Now, rising prices can lead to inflation, so that's always a concern. It also means that traveling abroad can be very expensive. You might want to post-pone that trip to Paris and visit the French Quarter of New Orleans instead.
And for your investing strategy, this is certainly an argument for having a well diversified portfolio. You want a certain portion of your portfolio invested internationally. And to find the right amount depends on your tolerance for risk. An easy way to get some exposure is to look for these big multinationals - companies based here in the US that have growing businesses abroad. AuWeter doesn't recommend that most folks get involved with trading currencies on their own - its awfully complicated. If you're looking at international equity mutual funds - some are hedged against currency risk -so you wouldn't benefit from the weakening dollar. But with the US economy on somewhat shaky ground, it's a good idea to spread your risk.
For more information on the weak dollar, or other personal financial advice, click here.
by Stephanie AuWerter and Jenn Eaker