The U.S. dollar has been weaker as of late and much is said about impending collapse of this current state as the world's trading standards.
While the concerns are legitimate, the dollar will continue to be the main trading currency for the foreseeable future. Still, as the dollar weakens there are consequences and understanding the impact of a weak U.S. currency can be helpful as you invest your portfolio.
A weak dollar, in the short-term, may help the American economy. With Americans spending less, there needs to be replacement for consumer spending in U.S. GDP. A weak dollar makes U.S. goods and services cheaper for foreign buyers and therefore will likely increase the amount of exports. This can be a substitute for a reduction in consumer spending. This could create a jumpstart for the economy as it struggles to emerge from the recession. Perhaps short term, the consumer simply needs to partially resume spending for the U.S. economy to rebound. But remember it is a fine line as a positive point; the cost of importing foreign goods will rise as well.
A weak currency in the long-term creates problems for economies. In order to attract more investment in U.S. debt, interest rates will likely have to rise at some point. This, coupled with low interest rates currently in place by Federal Reserve policy, can create inflationary pressure. And high interest rates are not good for businesses or consumers as it tends to have a constraining impact on investment and consumption. Mid- to-long-term, a weak currency could very well impact economic growth and resulting investment returns.
A falling dollar affects oil prices as there is a direct impact of a weak dollar on oil. Oil is priced in U.S. dollars so it becomes a very simple pricing issue. If the dollar falls, foreigners are able to acquire oil at a cheaper cost because their currencies are stronger against the U.S. dollar and they tend to buy more oil.
Of course, other issues affect the price of oil as well but currency plays a major role; as we have clearly seen as of late. A weak dollar is a tailwind for energy prices despite supply/demand findamentals.
A weak dollar makes U.S. real estate attractive to foreign investors. With a shaky real estate market, any support and demand is helpful. The U.S. economy is very dependent on the the real estate market so a weak dollar might help in stabilizing prices. This might very well lead to a better-than-expected recovery for American financial institutions.
These are just a few thoughts about the impact of a falling dollar for the U.S. economy. As we exit this financial downturn, understanding the variables impacting your investment strategy is critical to investment success. Assess and adjust. Be aware and proactive. And understand the consequences of the day's headlines; it's an important key as you invest your portfolio.
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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). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.