In recent months, the US dollar has slid against major currencies including our Pound Sterling (GBP).
Naturally that raises questions and has probably had some wondering if a weak dollar makes the US a bad investment choice.
The short answer is not necessarily – and there are opportunities too. A weak dollar can unlock new opportunities especially for investors who look beyond the headlines and enjoy the benefits of a diversified portfolio.
This article isn’t personal advice. Remember, investments rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment’s right for you, ask for financial advice.
How does it affect UK investors?
Currencies move quite a lot and for an investor in overseas assets, this means you’re exposed to risks associated with that value. In the case of a weaker US dollar, investments in dollars would mean getting back fewer pounds for every dollar you make – if the decline was to continue.
Even a strong performing US fund might not be as great in sterling terms if the currency isn’t stable. To eliminate or reduce currency risk, professional managers would perform a currency hedge and fix the exchange rates for their investments. This way, they know their returns won’t be impacted by movements in exchange rate.
A weak US dollar can create opportunities
The US dollar is a frequently used currency underpinning trade in commodities like gold or coffee, some emerging market debt and various international transactions.
From a US perspective, it makes certain US exports cheaper – because it costs an importer from the UK less to buy a product in GBP. For example, imagine a UK importer bringing in 1000 shirts at $10 each from the US, this is how an assumed exchange rate, ignoring other factors, can affect the costs.
USD Cost | Exchange Rate | GBP cost |
|---|---|---|
10,000 | $1 = £1 | 10,000 |
10,000 | $1 = £1.2 | 8,333 |
Previously, you had to spend £10,000 to get 1000 shirts. Now it’ll only cost you £8,333 for the same order.
However, the opposite is also true. It makes imports into the US more expensive so those relying on foreign goods would have to take measures to secure their margins. In a similar example, a US firm is importing 1000 books at £10 each from the UK.
GBP Cost | Exchange Rate | USD cost |
|---|---|---|
10,000 | $1 = £1 | 10,000 |
10,000 | $1 = £1.2 | 12,000 |
Initially, it would have cost $10,000 to bring in those books but now it costs them $12,000 for the same order.
Another key consideration is how integrated the global economy is. Many leading firms in the US are multi-nationals and get their revenues from overseas – receiving earnings in Sterling or Euros for businesses operating in the UK and the Eurozone.
Converting those earnings back to US dollars could see them make significant local currency gains. This is especially true for several large tech, materials and communication services firms in the US.
Currently, about 40% of total revenues from firms in the S&P 500, the index of the largest 500 public companies in the US, comes from overseas.
For emerging economies, a lot of governments issue their debt in US dollars.
A weakened dollar could make their debt easier and cheaper to service which benefits the country’s balance sheet by reducing the cost of borrowing. As this might help to drive economic growth, it can create opportunities amongst both stocks and bonds.
On the other hand, the net impact depends on how the weaker dollar impacts any key exports. What if a cattle farmer in Mexico relies on exports to the US? As the US dollar weakens, they become less competitive against a rancher in Texas.
A final side effect would be commodity prices.
As most global commodities are priced in US dollars, a shift in the currency value could effectively make these raw materials cheaper for a foreign buyer. This might then support demand and drive prices even higher. Other forces like tariffs or trade wars however could change the outcome entirely.
Looking ahead
Currencies, like markets, move in cycles.
They’re influenced by geopolitical relationships and policies. Over the longer term, short-term swings tend to matter less than the strength of the underlying business you may be invested in.
A weaker US dollar could shift the current winners and losers but it doesn’t change the fact that many US firms remain some of the most innovative and globally competitive in the world. And for a foreign investor, that could present an opportunity for long-term appreciation if the currency was to strengthen.
The overarching lesson however, is the focus on global & sector diversification, and fundamentals underpinned by a long-term investment strategy to drive success. The patient investor is often rewarded.
It’s clear that time in the market counts most for potential growth, so you don’t need to be as concerned about timing the market.
Not sure how to get started?
The HL Ready-Made Investments are all-in-one investment portfolios which are designed to make investing easy and accessible.
Simply choose the investment that best aligns with your goals and the level of risk you’re comfortable taking and leave the day-to-day investment decisions to our expert managers.
You only need to pick one of these funds to have a diversified investment portfolio.
The HL US fund aims to invest in US shares for long-term growth. The fund is managed by a team of external portfolio managers with different styles, overseen by HL’s fund managers. It is part of HL’s Building Block range for people who are comfortable building their own portfolios. It could fit well in a portfolio that would benefit from exposure to the US.
HL Ready-Made investments and the HL Building Block range are managed by Hargreaves Lansdown Fund Managers Limited, part of the Hargreaves Lansdown Group.