Image by: 401(K) 2012
By Michael Sterling
Currency fluctuation is one of the most difficult things to wrap our heads around, yet it profoundly impacts our lives. Exchange rates are always moving based on supply and demand, economic stability, capital flows, and much more, so it’s hard to decipher whether a change in rates are a good or bad thing for personal investments.
The value of our currency in the foreign exchange market is a huge tool within the central banking system and has a significant impact on their monetary policy, which in turn, affects our interest rates. As investors, it’s crucial to know where the pebble that hits the water comes from, and in the eyes of the system, it all begins with the rate of currency.
On Thursday, MarketWatch reported the economy grew at an annual rate of 2.5% in the second quarter, while analysts expected GDP to be raised to 2.3% due to better trade data. But don’t let this information fool you. What most Americans fail to see is that although a great economy might seem like a good thing, it isn’t all it’s cracked up to be.
Over time, a booming economy might start to effect our daily expenses. Industries may be rendered uncompetitive and many jobs can be lost. Not to mention, interest rates on your mortgage can increase, while products in the grocery store might get higher in cost. In terms of personal investments, you must take precaution.
But whether the American dollar is rising or falling in value, the smart investor will tell you that it really doesn’t matter. All it takes to survive is a shift in strategy.
Strong Economy = Stronger Multinational Companies
When the economy is strong, invest in U.S. multinational companies. These types of companies receive a huge part of their earnings from foreign countries and are boosted by a weakening dollar, while it still continues to survive on a strong dollar. It’s a win/win situation.
When the economy is doing well, investing in multinational companies will be cheaper. When the dollar is strong, you have an upper hand on American companies compared to the rest of the world. Shop the market and look for long term investments that will be an asset, with or without a strong economy.
How Can I Benefit From A Weakening Dollar?
It’s important to know when the U.S. Dollar is weak, foreign investors will always profit if they beat you to the punch, especially through the purchase of real estate and other tangible assets, since it’s relatively inexpensive in regards to their currency. But there are other ways that we can turn a weak dollar into gold.
Let’s say you’re investing in a company which has a subsidiary somewhere in Europe. Because of this, they have no choice but to use the euro. When they transfer it to U.S. currency with a falling dollar, for example, one euro might buy $1.57 compared to the alternative, which might buy $1.32. Over time, it is this company that will benefit while their net income becomes higher and higher.
Keep this idea in mind when you’re shopping the foreign market. Invest in the currency you believe will be stronger against the U.S. dollar during the time frame of your investment, or at least while the dollar continues to drop in value.
For a more long term strategy, investing in Sovereign Wealth Funds (SWFs) is a great idea. An SWF is the money a country sets aside to benefit their economy down the road. By investing in an SWF, your exposing yourself to rising currencies throughout the world.
Check out the Sovereign Wealth Fund Assets Map, provided by the Sovereign Wealth Fund Institute. It shows the strongest SWFs in the world today, based on oil or non-oil revenue. At the top are Norway, Saudi Arabia, and UAE-Abu Dhabi for Oil and Gas profits.