The Pros and Cons of the Strong Dollar

If you’re an investor or just a regular watcher of business television you may have heard a lot about the current strength of U.S. currency, although not with the positive inflection one might expect. It almost seems strange to question whether a “strong dollar” could be a good or bad thing for the United States and yet it isn’t as clear-cut as the name would imply. Recently many American companies have pointed to the strength of the dollar as a reason for their financial woes and missed earnings. So what are the benefits and drawbacks of our local currency being on an upswing?

This year the US dollar hit an 11-year high against most foreign currencies. While the strength of the US dollar is a good thing overall, it spells lower profits for American companies that sell products overseas. For example, companies like Costco saw lower earnings partially due to currency exchange and, in a recent earning announcement, Disney said they expect to lose $500 million next year for similar reasons. Back in June, CNBC even said that the strong dollar was causing “billions in corporate damage.”

So how does this affect you? That depends on your portfolio and maybe your traveling habits. If you invest in companies that make a lot of their money overseas, you could see their stock prices dropping when their lower earnings are announced. Disney, for example, tumbled 11 points the day after their August 4th call (although, to be fair, ESPN and ABC may have more to do with that than foreign exchange). To combat these possible hits to your portofolio, U.S. News recommends diversifying with more domestic-centric companies that won’t be as susceptible to falling returns from overseas.

On the upside, now is a great time to take a vacation as you can literally get more for you money thanks to the dollar’s strength. The typically expensive city of Tokyo, Japan is especially attractive right now with the dollar up and the yen down. CNBC also suggests Russia, the Euro Zone, and others as possible destinations to enjoy while the dollar is strong.

Overall the recent strength of the dollar is a good thing for average Americans who may wish to capitalize by taking foreign vacations or buying imports. Additionally as The Street points out, the strong dollar also keeps inflation down and assists domestic manufacturers. However, investors in multinational corporations should be wary of impending earnings reports and their effect on stock prices.