How the Strength of the U.S. Dollar Impacts Your Investment Portfolio - Your Money Briefing

Wall Street Journal

5 hours ago

Uncertainty around the economy, from tariffs to trade wars, has sunk the value of the dollar to its weakest level in years. Certain stocks do better when the dollar is weak while others perform worse. Host Oyin Adedoyin talks with finance professor Derek Horstmeyer about how investors can position their portfolio, depending on whether the dollar rebounds or continues to fall.
Full Transcript
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Speaker 1: Here's Your Money Briefing for Tuesday, June 17th. I'm Oyin Adedoyin for the Wall Street Journal. The U.S. dollar is one of the most powerful currencies in the world. Recently its value has been dropping, that has implications for investors.
Derek Horstmeyer: There is so much speculation now about whether the dollar and our T-bills and our long-term debt are still the safest assets in the world to pile into. And with all of this uncertainty regarding tariffs, and it's a really important thing to watch.
Speaker 1: We'll talk with finance professor, Derek Horstmeyer, about why we should all be keeping an eye on the U.S. dollar right now. That's after the break. The U.S. dollar has tumbled in value over the past few months. Amid tariff turbulence and economic uncertainty, many on Wall Street are hoping that the trade deals the U.S. is striking with other countries will help the dollar bounce back. Derek Horstmeyer is a professor of finance at George Mason University. He also wrote a recent piece for the Wall Street Journal, where he and his team ran the numbers on how some stocks perform when the dollar weakens. Derek, before we go into what this means for investors, why should our listeners care about the dollar falling in value?
Derek Horstmeyer: Well, the dollar falling has a significant impact on risk assets in our economy. First off, we see that if the dollar falls in value, international stocks seem to do the best. Vice versa, if the dollar increases in value, we see that U.S. small caps tend to do the best.
Speaker 1: That's pretty interesting. Historically, what is the relationship between stocks and the dollar? I'm trying to get a better understanding of why we see this inverse relationship.
Derek Horstmeyer: In general, if the U.S. dollar goes down, the reason why we see international stocks do better is purely an exchange rate phenomenon. If you have an international stock and they, let's say, are mostly operating in euros, once they convert their euros over to a weaker dollar, here in the U.S. we see those stock prices go up. Because, obviously, our U.S. markets are quoted in U.S. dollars.
Speaker 1: So for investors who are concerned about the dollar going down, where should they have their money right now?
Derek Horstmeyer: The biggest spread that we see between when the dollar goes up and when the dollar goes down, again, is in international stocks. So this would be foreign ETFs, U.S. dollar denominated, so if you can find an ETF that tracks European companies or Asian companies, or even a large conglomerate of companies, that typically is the best. So in such cases, we would see if the dollar went up in a given month, international stocks here in the U.S. tend to move just about 0%, so they don't move at all. But if the dollar goes down in a given month, international stocks move about 2.5%. So that's the biggest spread that we saw in our results.
Speaker 1: That's fascinating. How about those who are holding out hope the dollar is going to bounce back?
Derek Horstmeyer: If the dollar bounces back, your best bet is to stay local. So this is companies that produce and have their revenue here in the U.S. The best bet there are usually U.S. small cap, so let's say like the Russell 2000. In those cases, we see companies that are operating locally, don't have much foreign revenue, produce and operate here in the U.S., those are the best bets for a strong dollar.
Speaker 1: Can you give me some idea as to what types of stocks perform best when the dollar is weak?
Derek Horstmeyer: The one area of the economy that does really, really well when the dollar is down or weakening are commodity stocks. Commodity stocks usually moves inverse to dollar strength. So you can imagine, copper stock, silver, gold, any sort of hard commodity.
Speaker 1: I'm curious why commodities are different.
Derek Horstmeyer: Commodities are measures of fear. We would include gold in that scenario. So if the dollar is weakening, it usually means people are piling into gold. So we see an inverse relationship in that scenario.
Speaker 1: How does the bond market perform when the dollar strengthens versus when it weakens?
Derek Horstmeyer: We see similar results when we look at the bond market. Across the board, again, bonds tend to do a little bit better when the dollar decreases in value. Your best bets, if you see the dollar weaken, is in long-term debt or in high-yield debt. And we think the fundamental reason there is, when the dollar weakens, a lot of times that means rate cuts might be coming. So your long-term debt and your high-yield debt tends to do best when there is an expectation of rate cuts.
Speaker 1: So looking back at everything, why is it so important for us to watch the dollar right now? What makes the dollar unique amongst the world's other currencies?
Derek Horstmeyer: There is so much speculation now about whether the dollar and our T-bills and our long-term debt are still the safest assets in the world to pile into. And with all of this uncertainty regarding tariffs and everything else, I think it's a really important thing to watch. One really unique thing that we saw over the past month or two is that the dollar, stocks, and bonds all move together, which is a very rare phenomenon. So the dollar weakened, stocks weakened, and bonds weakened, and that's a really rare phenomenon that you usually only see in emerging market economies. So that is something to watch if that is a one-off or if that will continue to repeat itself.
Speaker 1: What is the rule of thumb for anxious investors right now? I've talked to a lot of investors in recent months who are just super stressed about where the economy is going and who are really uncertain.
Derek Horstmeyer: I would say don't overreact. We know that investors tend to overreact to really negative news, and that costs investors 2 to 3%, by some estimates, to their returns on an annual basis, which is very significant. That would be selling at the bottom and buying at the top. And that, again, is due to overreaction to news. It's the tried and true kind of strategy here, which is stay the course. You can react on the margins to things, but try and update your portfolio as little as possible.
Speaker 1: That's finance professor, Derek Horstmeyer. And that's it for Your Money Briefing. This episode was produced by Ariana Aspuru and Coleman Standifer, with supervising producer, Melony Roy. I'm Oyin Adedoyin for the Wall Street Journal. Thanks for listening.