Through the end of March, the U.S. dollar’s year-to-date return was marginally weaker against a basket of other currencies, and this softness may continue throughout the year. In order to better understand how investors can take advantage of a weakening dollar, U.S. News & World Report recently spoke with Delegate Advisors Managing Partner Andy Hart. In the article, Hart discusses three ways to invest when the dollar is falling: sovereign debt, international company debt, and emerging market equities.
According to Hart, sovereign-debt investments possess the potential to perform well when the dollar softens. When researching these foreign fixed-income investments, he recommends that investors search for countries that are rated by credit agencies as investment grade. A weakening dollar is then able to benefit these investments in two ways: currency appreciation and the discrepancies in interest rates between the U.S. and the other country.
Another debt-focused investment to consider when protecting against a weakening dollar is international company debt. As with sovereign-debt investors, fixed-income investors in international corporate debt can also earn a profit as long as they look for companies with investment-grade debt.
Lastly, Hart says investors diversifying their portfolios with emerging market equities can benefit from a falling dollar in a multitude of ways. Emerging market equities are typically focused on commodities. As a result, “they get a bump in activity when commodities’ prices rise, but more importantly, most of their debt is dollar denominated,” says Hart.
Due to this connection, when the dollar falls relative to the currency where they generate revenue, the cost of paying their debt also falls. Companies with large international sales benefit since they are paid in a higher priced currency. However, in order to avoid having too much exposure to one country, Hart recommends using a diversified cap-weighted index fund.