In the foreign exchange market, the relative strength and worth of the U.S. dollar against other currencies are described in general terms using the words weak dollar and strong dollar. Any currency can be described as “strong,” “weak,” “strengthening,” or “weakening.”
Strong vs. Weak Dollar
A strong dollar is one that has risen to a level where the exchange rates of other currencies vs the dollar are nearing previously high levels. If the exchange rate between the two nations fluctuated between 0.7292 CAD/USD and 1.0252 CAD/USD and the current exchange rate was at 0.7400 CAD/USD, the American dollar would be seen as weak and the Canadian dollar as strong.
A strong U.S. dollar indicates that the price of the currency is at an all-time high. Both the phrases strengthening and weakening pertain to variations in the value of the US dollar over time, therefore they both have the same meaning. A stronger U.S. dollar translates into it being able to purchase more of the other currency than it did previously.
The converse is true when the value of the US dollar declines relative to the other currency, which leads to more US dollars being swapped for the stronger currency. For instance, if the USD/NGN exchange rate was quoted as 315.30, $1 USD would be equivalent to 315.30 NGN. The U.S. dollar would be seen to have weakened in relation to the Nigerian naira if this quotation falls to 310.87 since $1 USD now buys less naira than it did previously.
How a Strong Dollar May Impact Investments
Soon after Donald Trump was declared the winner of the 2016 presidential election, the U.S. dollar rose to its greatest levels in years. After investors reacted to the previous president Trump’s tax and trade proposals, the dollar has since seen tremendous volatility.
Contrary to what market movements may have you think, a strong US currency is not always correlated with a healthy US economy. As was said before, strength is measured in relation to other currencies whose values are being lowered in an effort to support growth. Deleveraging, which occurs as loans are paid off and results in fewer dollars in circulation while raising the value of those dollars, is another factor that cannot be discounted.
Impact on International Businesses
Large-cap international corporations may suffer from a strong U.S. currency since it raises the cost of American products abroad. The U.S. dollar’s continued appreciation might potentially have a long-term detrimental effect because foreign shoppers would start to shun American brands.
Technology, energy, and basic materials are the industries most affected by a strong dollar, but there are many more large-cap stocks whose profits have already suffered and may continue to do so. A strong U.S. dollar has adversely affected or might adversely affect several companies, such as:
- General Motors Co. (GM)
- 3M Company (MMM)
- Procter & Gamble Co. (PG)
- Estée Lauder Companies Inc. (EL)
- International Business Machines Corp. (IBM)
- Chevron Corp. (CVX)
- United Technologies Corp. (UTX)
- Accenture Plc (ACN)
- Oracle Corp. (ORCL)
Domestic Businesses Protected from US Dollar
On the other hand, the U.S. dollar won’t have a detrimental effect on domestic businesses. Even while the domestic economy is frequently touted as robust, this is mostly due to the labor market. The strongest predictor of the health of the labor market is frequently the labor force participation rate, not merely the unemployment rate.
The following businesses could be worth more research if you’d prefer a long-term stock selection strategy without having to worry as much about a U.S. currency impact:
- Alaska Air Group, Inc. (ALK)
- Dollar General Corp. (DG)
- The TJX Companies, Inc. (TJX)
- CVS Health Corp. (CVS)
- The Allstate Corp. (ALL)
- UnitedHealth Group Inc. (UNH)
FX traders and any other foreign currency trades will be impacted by the strength or weakness of the US dollar. When choosing stocks, it may be wise to avoid global corporations and focus instead on businesses with just domestic exposure because they are less significantly harmed by a falling dollar.