The U.S. dollar is in decline.
Since March 23, when Fed announced QE Infinity, it has depreciated by 8% as measured by the U.S. Dollar Index (DXY).
This means that all your vacations abroad (not that you’ll be having any this year) just got 8% more expensive.
And since we’re talking about a QE “Infinity” here, I don’t expect this decline to stop any time soon.
But this shouldn’t necessarily be something negative.
A weaker dollar can represent an opportunity if you know where to look.
There are many companies, asset classes, and countries that thrive in such an environment, and because of this, they are a worthwhile investment.
Let’s look at some of them.
Precious Metals Are A Must Buy
The declining dollar has always been a major driving force for one asset class in particular—precious metals.
Gold and silver are risk-off investments, and, as such, people use it to diversify their portfolios.
But they’re hardly the only option out there, and so they have to compete with others safe-haven assets. The biggest one being U.S. government bonds.
However, since U.S. government bonds are denominated in the U.S. dollar, their value directly corresponds to its movements.
Therefore, where you to buy a U.S. government bond on March 23, for example, it would lose about 8% of its value by now.
Because of this relationship, precious metals tend to perform well during periods of a weaker dollar. They are the more attractive safe-haven alternative.
Of course, there are other factors influencing gold prices, and you can read more about those in this essay.
Also, if you’re considering buying gold, I wrote about three ways to do it here.
These Five Stocks Thrive In Weak-Dollar Environments
You might find this counterintuitive, but in general, governments prefer a weak currency.
The reason is that it makes exports a lot cheaper, so other countries are more likely to buy from you. This means industry output will be higher, leading to lower unemployment and economic growth.
China, for example, is notorious for devaluing its currency to boost its economy. Now, it’s the United States’ turn.
The way to profit from this is to buy stocks of international companies with huge exports.
Here are five such American blue chips you should consider:
CAT (CAT), John Deere (DE), Freeport McMoran (FCX), AGCO (AGCO), and Celanese (CE).
Emerging Markets And Dollar-Denominated Debt
Another class of stocks profiting from the weaker dollar is emerging markets.
That’s because in these countries, borrowing money in domestic currency is more expensive than doing it in U.S. dollars.
One reason for this is geopolitics and the fact that the United States is pressuring these countries to keep their interest rates high. But I don’t want to get into this right now. There’s a fascinating documentary that also covers that topic called Princess Of The Yen. I can’t recommend it enough, and you can watch it for free on YouTube.
The vital thing to remember is that when you have your debt denominated in U.S. dollars, and the dollar is rising compared to the domestic currency, it means that the value of that debt is increasing as well.
As you can imagine, this can be quite inconvenient. Nobody likes to see their debt grow.
Naturally, conversely is true if the value of the dollar is falling. Meaning that, right now, the emerging markets and their companies are benefiting from lower debt obligations. And with lower costs come higher profits… and higher stock prices.
The most straightforward way to play this is through an emerging markets ETF. I recommend you look at iShares MSCI Emerging Markets (EEM).
Good investing,
Leon Wilfan
