MarketsAug 13, 2020
The Dollar Is Falling. The Dollar Is Falling
Forex Strategy
Victor Lei
Discover
The US dollar is falling but don’t let chicken little scare you.
The U.S Dollar Index, an index that measures the value of the USD compared to foreign currencies, fell over 9% since March 2020. Global investors have been selling the US currency over fears of poor economic conditions and rising inflation in the US.
(TAJ: What is inflation and why too much of it is bad?)
The biggest, baddest of ‘em all
The US dollar (USD) is the strongest and most popular currency in the world. Foreign banks hold a large portion (~62%) of their cash in USD, 40% of the world’s debt is denominated in USD and global businesses rely on the USD to conduct trade.
Andrew Hunter, a senior US economist is forecasting the USD to fall an additional 5% over the next two years against major currencies. The most negative outlook forecasted a 35% drop…
Not as bad as it sounds
The impact of the USD falling isn’t as bad as it sounds. A falling USD is known to benefit US stock prices as it makes it cheaper for international investors to buy US stocks with foreign currency.
The benefits will be mixed for different industries. US-based companies that earn the majority of their earnings overseas could see a boost in revenue – a lower US currency makes it cheaper to purchase US goods by foreign countries.
As for US companies that pay expenses/buy production materials overseas, they could see a negative impact as prices go up.
The Action
Goldman Sachs recommends these stocks that generate a large portion of their revenue from overseas and could benefit from a lower USD: Nvidia, Applied Materials, Qualcomm, Texas Instruments, Facebook.
In gold we trust: A rising USD historically benefited gold. In years that the USD was falling, gold averaged a 17.6% return. In the years that the USD was rising, gold averaged a -0.8% return.
(TAJ: How gold investment beat market returns in 2020 and why analysts think it’ll break new records)
