What a Strong U.S. Dollar May Mean for Investors

November 10, 2022

Should you adjust your portfolio in response to a strong U.S. dollar?

#--bcn-image--5030{display: none !important;}

Investors across the globe have been flocking to the U.S. dollar since mid-2021, pushing some foreign currencies to their lowest levels against the greenback in years.¹ But what's behind the dollar's appeal?

"Demand for the U.S. dollar has increased for several reasons," says Kathy Jones, Schwab's chief fixed income strategist. "The United States emerged from the pandemic stronger than many other countries, partly because of aggressive spending and stimulus measures out of Washington. And many investors believe the U.S. will continue to outperform the broader global market in the coming year, thanks to the Federal Reserve's focus on taming inflation."

Meanwhile, the war in Ukraine and China's COVID-19 policies are weighing on Europe and Asia, respectively. "The U.S. dollar is something of a safe haven the world over," Kathy says. "It's backed by the full faith and credit of the U.S. government, and the market for it is broad and deep, making it highly liquid. That's not the case for many currencies right now."

But what does this mean for U.S. investors? It's a mixed bag:

A stronger dollar makes the costs of imports cheaper. "And that's welcome news right now, particularly given how much we rely on foreign goods," Kathy says.
However, a strong dollar can also undercut foreign bonds, particularly those from emerging markets. "Over the past decade, a lot of emerging-market countries and companies issued dollar-denominated bonds to attract investors hungry for higher yields," Kathy says. "But with many foreign currencies now struggling against the dollar, it has become much more expensive for issuers to service that debt, leading to a growing risk of downgrades or defaults."

If you're a tactical investor, you might consider cutting back your portfolio's foreign bond allocation in favor of domestic issues for the time being. "But for everyone else," Kathy says, "sticking to your asset allocation and rebalancing regularly should help offset any bumps that result from fluctuations in the dollar's value."

¹Karl Russell, Joe Rennison, and Jason Karaian, "The Dollar Is Extremely Strong, Pushing Down the World," nytimes.com, 07/16/2022.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Currencies are speculative, very volatile, and not suitable for all investors.

Investing involves risk, including loss of principal.

Past performance is no guarantee of future results.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations,
Liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when a nonretirement account is rebalanced, taxable events may be created that may affect your tax liability.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

1122-2XDM