When the Dollar Is Strong, Investors Can Struggle

While the value of the U.S. dollar rose 9.3% in 2022 amidst hiked interest rates, nearly every major currency lost value against it, according to the U.S. Dollar Index.

Though it may seem that such news would be good during a period of inflation, some economists believe it could signal trouble for investors and the overall American economy.

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With a strong U.S. dollar, the cost of imported goods decreases, and people pay less for them at the store. But with inflation and interest rate hikes, a strong dollar worsens the contraction that multinational companies are experiencing, according to Kiplinger. About 40% of revenue in the S&P and more than 50% in the technology sector is international.

Add the Russian invasion of Ukraine to the mix, and conditions worsen. As most commodities are priced in dollars, the cost of affected products such as wheat and oil increase. Some countries are priced out and cannot buy essential commodities.

Also, a strong dollar boosts public debt, increasing the cost of interest payments for foreign entities and citizens with U.S.-based loans.

The measures the Federal Reserve has taken seem to have slowed inflation in the U.S., but contributed to its increase, or slowed its decline, in the rest of the world, according to Kiplinger. Thus, less revenue may come into the U.S. from abroad.

In other countries, central banks may raise interest rates to shore up their currencies, though such actions contribute to higher unemployment and weigh on economic growth.

Finally, foreign investments typically underperform when the dollar rises. Stocks will be expensive for foreign investors when purchased with a currency of lesser value. Some large U.S. companies, including Apple, Microsoft, and Alphabet, reap a significant percentage of profit from abroad and could confront valuation pressures as revenues decline.

Certain types of stocks, though, do well in a high-dollar environment. As U.S. imports increase, U.S. exports wane, so investing in industries that export to the U.S. may prove profitable.