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What An Almighty Dollar Means To You
Aspire, Investments | 20 May 2015
By: Lim Si Jie
Articles (169) Profile

 

The almighty US dollar is now at its highest level since 2003 before the financial crisis hit in 2009. As the US economy surges and most others slump, investors are flocking to the dollar. However, a stronger dollar does not necessarily equate to a strengthening US economy, especially with other major economies weakening their currencies.

Inevitably, the impacts of a relatively stronger Dollar are gradually affecting the US economy. Should investors still stick to US firms which have been on a six-year bull run? Or should we be considering foreign firms that are able to capitalise on the stronger Dollar?

New Financial Order

Historically, US is the leading decision maker of interest rates. Developed economies follow suit whenever US increase or decrease their interest rates. However, we are witnessing a new financial order unfolding, where the US and other major economies are making opposite decisions.

The US is the only country preparing to raise its interest rates while the rest of the developed economies continue to offer low or negative interest rates without any sign of rake hikes.

Higher US interest rates and lower interest rates in major economies would only make the dollar more attractive and continue to push its value higher. However, Federal Reserve Chair Janet Yellen suggested in March 2015 that the Fed was in no hurry to raise interest rates.

Source: Bloomberg

Repercussions of A Stronger Dollar

The US Dollar Index (DXY) tracks the Dollar against six other major currencies. In 2014, the DXY soared 12.6 percent and hit an 11-year high in March.

The strong US dollar is enabling the US to borrow more money at low interest rates. American consumers can leverage on the dollar’s buying power to purchase imported goods for less while US politicians use it as evidence of the economy’s recovery.

However, the high dollar is pushing down inflation that’s already been considered too low for the good of the economy. The strong US dollar is also hurting earnings of some American multinational companies by reducing the value of sales abroad (exports).

And for the rest of the world, risk is accumulating as the stronger dollar makes surging dollar-denominated debt sold to emerging economies, such as Brazil and India, harder to repay.

Shifting Of Focus From US To Other Regions

US firms that are reliant on exports are seeing a cut in its revenue due to the stronger dollar. A weaker Yen and Euro due to QE and low interest rates worsens the situation as it hurts US firms by offering US consumers cheaper options from foreign competitors. This places US firms in a difficult situation as competition from foreign firms are now providing even stiffer competition than before.

One of the key theme that investors can capitalise on is to invest in overseas companies with a significant presence in the US. Investors could explore their options to invest in counters from outside of US that has a significant presence in the US (e.g. Toyota).

At the same time, investors should reduce their holdings on US firms that are reliant on exports (e.g. Pfizer) to take a smaller weightage in their portfolio.

HPH Trust To Benefit From Strong Dollar

HPH Trust, one of the world’s largest trading hubs, is heavily impacted by the business activities in the US. The strengthening dollar has been a boon for the container port business trust.

As the trust’s cargoes bound for US continues to trend upward, FOREX gains will also create an added boost to profits when income is translated from USD to HKD. The outlook for HPH Trust in 2015 is expected to be favourable in line with a strengthening US economy, positive consumer spending, and lower unemployment rates.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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