Welcome to the world of the fluctuating U.S. dollar. After gathering considerable strength against the euro for many months, the greenback reversed course last week with the most dramatic valuation swing in years.
This fluctuation occurred in response to efforts by the Federal Reserve to resuscitate the American economy through the purchase of Treasury bonds. This is a phantom interest rate cut and had an immediate impact on the strength of the dollar.
Don't ignore these fluctuations.
Currency considerations should be a part of your investment strategy. There are several points to consider when examining your investment strategy as it relates to currency fluctuations.
First, be aware that fluctuations in currency affect exports. With a weaker dollar, U.S. exports become more appealing. Foreign imports less so. U.S. exporters win while foreign importers lose. And this price preference on American goods has pseudo protectionist ramifications. Not the best thing for global trading partners like China as it seeks to revive it's slowing economy.
Still, despite the currency penalty, some goods will be imported and consumed, but at a higher cost and a resulting inflationary impact. Coupled with higher U.S. deficits, this could be a potent combination.
Second, a weaker dollar makes the impact of foreign capital more significant. It could boost investment in U.S. companies from foreign institutions with cash to spend. Infusion of capital is just what many companies are looking for now. Of course, watch for the backlash against foreign acquisitions. Conversely, U.S. investors may be tempted to hold back investments in foreign markets that have become accustomed to large capital inflows from American investors. This could have an impact on international equities.
Finally, don't forget commodities. Many assets such as oil, are denominated in U.S. dollars and this adds a tailwind to this asset class.
Be warned. It's not a given that the dollar will continue on its recent weak path. The reality is other foreign central banks, including Europe and China, could very well choose to further stimulate their economy by adopting measures similar to the bold action taken by the Fed. The UK and Japan have already traveled down the same path of quantitative easing. And frankly, most global economies are in serious trouble -- the United States is not alone in it's struggles.
Currency strategy is an investment theme to pursue but requires careful thought and strategy. It should be made in concert with other investment themes. There's great risk in making it your only investment thesis. But in the age where we need to scrape for any returns available, examining the effect of dollar fluctuations on your portfolio strategy certainly makes sense.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. He appears regularly on CNBC and CNBC Asia and can be reached directly at email@example.com.