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.