The Falling Dollar - The Debate Rages On

By Kristina Zucchi, CFA | November 16, 2010 AAA

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?

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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.)

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