Falling Dollar Benefits Large U.S. Multinational Companies
Who would want the US Dollar (USD)? This is a question investors and traders ask themselves all the time. The US Dollar continues to fall and nobody can see the light at the end of the tunnel. Look at the chart below. This is an index of the US dollar against a basket of currencies. It makes me want to yell “Pull-up, Pull-up!”
Clearly, nobody wants to hold US Dollars.
This truly looks horrible. The fall in the dollar has been highlighted by several journalists as the end of the great US economic system. Believe it or not, they’re wrong (journalist can’t be wrong, can they?). The falling US dollar is actually a good thing for the economy, the financial markets, and especially the mega-capitalization stocks that make up the S&P 500 and Dow Jones Industrial Average.
But, before I tell you why, here’s a little background.
About 2 weeks ago, I argued that a falling dollar is good for the US economy in my article “Can A Falling Dollar Be Good For The Market?”. Until now, many investors were relying on the decoupling of the US markets from the rest of the world. Decoupling is a myth. The impact of a slowing economy in the US will hurt other economies around the world.
As the global economy slows, investors will seek a safe haven for their investment dollars. The US markets have traditionally been the best safe haven in the world. The flood of money returning to the US will seek out investments like stocks, bonds, and real estate. This has already started to happen with recent investments from sovereign wealth funds.
Something even better!
The flood of money back into the US markets is going to help the economy over the long term. But, right now there’s a benefit to the falling dollar. In a word – exports.
The biggest benefit of a lower dollar value: US products are less expensive in global markets and foreign imports become more expensive. Think about it this way. If you run a business and your competition suddenly has to charge more for its products, you would be happy. You could be more aggressive competing for business and you would capture more market share, eventually making more money.
This is exactly what’s happening for every multi-national business based in the United States. Take any fortune 500 company, or any company with international sales for that matter. They can charge less for their products overseas and still make a profit. Or better yet, they can charge the same and make more profit.
Not bad if you ask me – but there’s more.
The falling dollar gets even better. It also works for the benefit of US companies selling products domestically. Foreign competitors who sell product domestically must raise prices just to keep profits the same. They have a choice, raise prices and risk losing customers or charge the same and risk losing profits. Either way it’s great for US based companies.
Improved price competition leads to better market share and higher profits. Both are positives for the company. With business metrics improving, the price of the stock can’t be too far behind. I’m sure the hawks in Congress are loving every minute of it . . . but I doubt you’ll ever hear a politician actually support a weak US Dollar.
How to profit.
This, for once, is easy. Look for large multinational companies that have US production and significant exports. Almost any mega-capitalization stock that makes up the S&P 500 and Dow Jones Industrial Average would qualify. Clearly, you want to focus on those with strong products and good growth. In this market, I’m partial to pharmaceutical companies. These companies will probably benefit the most (especially in a recessionary environment).
For our options traders out there, we’ve been testing a new investment system that is based on options on currencies. Early results have been extremely promising. We plan on rolling out the full version of the system sometime in the next several weeks. Keep an eye out!
Category: Currency Trading
