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Usually, the U.S. dollar does well when the economy is doing really well and when the Federal Reserve (the central bank of the United States) is raising interest rates. However, the bond market, where government debt is traded, is now expecting that the Federal Reserve will lower interest rates multiple times by the end of 2023.
Investing in a falling dollar can offer promising opportunities for investors. Here are seven ways to invest:
- U.S. companies generating international sales
- Commodities
- Gold
- Cryptocurrencies
- Emerging markets
- International stocks
- International currency ETFs
U.S. Companies Making Money Internationally
Commodities
When the U.S. dollar weakens, it often leads to higher prices for commodities traded in international markets. This is because most commodities are priced in U.S. dollars. However, the relationship between the U.S. dollar and commodity prices is not always predictable. In 2022, for example, commodity prices remained strong even as the U.S. dollar gained value. There have been periods, like in the 1980s and 2000s, when both commodity prices and the U.S. dollar rose together due to factors such as high inflation, interest rate tightening, and increased costs of goods, which eventually led to recessions in the United States.
Investors interested in commodities in 2023 can consider purchasing popular commodities exchange-traded funds (ETFs) like the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC). These ETFs provide a way to invest in a diversified portfolio of commodities.
Gold
Gold, like many commodities, is generally priced in U.S. dollars. Although the U.S. dollar is no longer backed by physical gold, its value still has an impact on the price of gold. Gold prices have been rising since the beginning of 2021 as investors seek it as a hedge against inflation. Additionally, during times of currency volatility, investors often turn to gold as a stable asset to preserve their wealth.
To protect themselves from potential losses due to a weakening U.S. dollar, investors can consider buying shares of popular gold exchange-traded funds (ETFs) such as SPDR Gold Shares (GLD) or the more volatile VanEck Gold Miners ETF (GDX). These ETFs provide a way to invest in gold without directly owning physical gold.
Cryptocurrencies
Investors who are willing to tolerate significant volatility can consider investing in cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and other popular digital currencies as a way to navigate a weaker U.S. dollar. Cryptocurrency prices are typically quoted in dollars, and many investors view them as digital versions of traditional currencies or commodities.
While Bitcoin has shown exceptional long-term returns, it is important to note that cryptocurrencies can be highly volatile. Bitcoin, for instance, has experienced significant price swings, with no calendar year since 2015 recording gains or losses of less than 73% in value. In 2022 alone, its price dropped by 81%.
Investing in cryptocurrencies requires careful consideration and a high tolerance for risk, as the market can be highly unpredictable. It is essential to thoroughly research and understand the nature of cryptocurrencies before investing in them.
Emerging Markets
Apart from U.S. companies operating internationally, there are also international companies with limited exposure to the U.S. market that can benefit from a weaker dollar.
Investors seeking an aggressive approach to international stock investment can consider focusing on emerging markets like China, India, and Brazil.
According to Doug Carey, the owner and president of WealthTrace, a weaker dollar is advantageous for investors in emerging-market funds. When U.S. investors allocate funds to foreign investments, the conversion of those funds back into dollars can impact their value. If the dollar strengthens against the foreign currency, the investment’s value declines proportionally to the dollar’s increase.
The Vanguard FTSE Emerging Markets ETF (VWO) is an example of a widely recognized and cost-effective emerging-market ETF available in the market. Investors can consider this ETF as a way to gain exposure to emerging markets.
International Stocks
Investors who want to mitigate risks associated with high-growth emerging markets can consider focusing on developed markets like Europe, Japan, and Korea. Investing in international stocks not only helps protect against a weakening U.S. dollar but also provides diversification from U.S. stocks and the U.S. economy. While developed markets may not offer the same level of growth as emerging markets, they tend to have more stable and reliable economies.
The Vanguard FTSE Developed Markets ETF (VEA) is a popular investment fund that offers diversified exposure to international developed markets. Some of the top holdings of this fund include stocks like Nestlé SA (NSRGY), ASML Holding NV (ASML), and Samsung Electronics Co. Ltd. (SSNLF). Investors can consider this ETF as a way to gain exposure to a broad range of international developed market stocks.
International Currency ETFs
One straightforward approach to benefit from a weaker U.S. dollar is to invest in other fiat currencies. Foreign-exchange traders have the option to directly speculate on currency pairs, but there are also publicly traded trusts and funds that enable investors to buy and sell international currencies similar to stocks. For instance, the Invesco CurrencyShares Euro Currency Trust (FXE) provides an opportunity to invest in the euro, while the Invesco CurrencyShares Japanese Yen Trust (FXY) offers exposure to the yen.
It’s important to note, however, that investing in currencies is considered a zero-sum game, according to Robert Johnson, a CFA and finance professor at Creighton University’s Heider College of Business. This means that when the U.S. dollar strengthens against a particular currency, those holding U.S. dollar positions benefit while those holding positions in that currency experience equivalent losses. Johnson suggests that if your goal is to build long-term wealth, investing in the stock market is a more favorable option.
Please be aware that investing in currencies involves inherent risks, and it is crucial to thoroughly understand the dynamics of currency markets before engaging in such investments.
