You cannot turn on financial news or open a newspaper today without seeing or hearing a debate about the falling dollar and the impact on the U.S. economy. Academics, financial experts and even the general public have been in turmoil over the state of the U.S. dollar and the impact of QE2 - the Fed's plan to inject $600 billion into the economy. So what does the falling dollar and purported $600 billion mean to the investing public?

IN PICTURES: 9 Simple Investing Ratios You Need To Know

Short-Term Effects
The falling dollar means something different in the long term than it does in the short term. In the short term, the falling dollar may be just what the U.S. economy needs. That is, a weak dollar means that U.S.-made goods or services are cheaper than they had been during a stronger dollar period. Therefore, companies that export goods will benefit as their expenses will be in cheaper U.S. dollars, and the revenues will be in stronger currencies. Companies such as General Electric (NYSE: GE) and Boeing (NYSE: BA) have already announced plans to increase manufacturing capabilities in the U.S. There is a two-pronged benefit - the first is to make jobs available in the U.S., and the second is to lower the costs for the companies. Other companies may feel the negative impacts of the falling dollar. Companies such as Nike (NYSE: NKE) or Sony (NYSE: SNE) may feel the impact of the falling dollar, as their goods will be more expensive to U.S. consumers. (For more on this topic, check out How U.S. Firms Benefit When The Dollar Falls.)

Long-Term Effects
In the long term, the falling dollar may result in higher inflation. Many skeptics of QE2 have complained that the Fed's actions are setting up the U.S. for inflationary pressures, although none are seen in the near term. Stocks that help to protect a portfolio during inflationary periods are commodity-based, real estate and technology companies. The market has already taken this into account, pushing the price of many commodities higher. Companies like Freeport McMoRan (NYSE: FCX) and Barrick Gold (NYSE: ABX) feel the positive impact of higher commodity prices. Food and agricultural manufacturers also hedge inflation. Fertilizer companies like CF Industries (NYSE: CF) and Potash (NYSE: POT) may be a round-about way of playing rising food prices. (For more, see Inflation: Introduction.)

Conclusion
The falling dollar has both long- and short-term effects. Positioning your portfolio to benefit from this trend results in different securities in the short term than in the long term. The question that remains is how long is the short term? If it is shorter than or exceeds expectations, then the portfolio may not be positioned properly to capture the appropriate upside. Unfortunately, since inflation and other financial data are backward looking, the timing of making portfolio decisions is often very difficult. (For more, see Taking Advantage Of A Weak U.S. Dollar.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!