The U.S. dollar hit its highest levels in 13 years shortly after Donald Trump won the election in November 2016. But since his inauguration, the corresponding dollar index has lost around 9% versus a basket of other currencies. The dollar is expected to keep slipping as investors gear up for a heated debate in Congress about President Trump's proposed overhaul to current tax policy – and the expectation of higher interest rates amid the arrival of a new Federal Reserve chairman in the months ahead.

However, what does the strength of the dollar say about the strength of the country overall? Does a weaker U.S. dollar meant the economy is weakening? Does a strong U.S. dollar suggest the opposite? A strong U.S. dollar is not about a strong U.S. economy, as many pundits like to state. The U.S. economy is not as strong as the dollar, at least for the moment. It’s about relative strength against other currencies where valuations are being reduced in an effort to help fuel growth, whereas the Federal Reserve has completed its accommodative monetary policies. Additionally, deleveraging is playing a role – debts being paid off leads to fewer dollars in the system, thereby increasing the value of those dollars.

See also: Trump Says Dollar Getting Too Strong

U.S. Dollar Impact

A strong U.S. dollar is bad for large-cap multinationals because it makes American goods more expensive overseas. If the U.S. dollar continues to appreciate, then it could also have a negative long-term impact because those overseas consumers will begin to turn away from American brands. 

The sectors most hit by a strong dollar are technology, energy and basic materials, but the large-cap names that will potentially see their earnings hit go well beyond these three sectors. And in those sectors, your research should be done on a case-by-case basis. Some of the names that have been negatively impacted or might be negatively impacted by a strong U.S. dollar: 

  • General Motors Co. (GM)
  • 3M Company (MMM)
  • Procter & Gamble Co. (PG)
  • Estée Lauder Companies Inc. (EL)
  • International Business Machines Corp. (IBM)
  • Chevron Corp. (CVX)
  • E. I. du Pont de Nemours and Co. (DD)
  • United Technologies Corp. (UTX)
  • Accenture plc (ACN)
  • Oracle Corp. (ORCL)

Domestic Strength

On the other end of the spectrum, domestic companies will not be negatively impacted by the U.S. dollar. However, you still need to use caution. The domestic economy is often advertised as strong, but this is primarily based on the labor market. If you want to know the truth about the labor market, look at the labor force participation rate, not just the unemployment number. There's a reason the Federal Reserve has kept interest rates at record lows for years. (For more, see: The True Unemployment Rate: U6 vs. U3.)

Due to a lack of wage growth and sustainable consumer spending, some of the names below should only be seen as potentially better options than the names above on a relative basis. The truth is that the vast majority of stocks will have a difficult time seeing appreciation over the next year. However, if you would like to be long without having to worry about a U.S. dollar impact, here are some names to research further:

  • Alaska Air Group, Inc. (ALK)
  • Dollar General Corp. (DG)
  • The TJX Companies, Inc. (TJX)
  • CVS Health Corp. (CVS)
  • The Allstate Corp. (ALL)
  • UnitedHealth Group Inc. (UNH)

The Bottom Line

If you don't believe the dollar will continue to decrease, and are concerned about the impact of the U.S. dollar on your investments, then consider staying away from multinationals and looking into companies that only have domestic exposure. 

Dan Moskowitz does not have any positions in the stocks listed in this article.

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