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What to do if the US dollar stays stronger for longer


With the US dollar projected to maintain its strength well into 2025, investors should be looking to ‘dollar-proof’ their portfolios, but what does that mean exactly?

The US economy continues to be extremely resilient, as underscored by strong inflation and labor market, meaning the Federal Reserve is less likely to cut rates this year. This prospect of possibly no rate cuts at all this year – when six were priced in at the beginning of the year – by the US central bank, has taken the dollar to new highs.

​Why does a strong dollar matter?

Whether you like it or not, a strong dollar has far-reaching implications for investors around the world. Import-dependent economies contend with escalating costs, while export-oriented sectors thrive on enhanced competitiveness.

​Many emerging markets face increased debt burdens when the U.S. dollar strengthens. As their local currencies depreciate, the cost of servicing dollar-denominated debt rises, straining government finances and corporate balance sheets. This phenomenon exacerbates economic vulnerabilities, leading to potential liquidity crises and hindering growth prospects in emerging economies.

​Additionally, capital inflows into U.S. markets bolster asset prices, reinforcing the dollar’s influence on the global financial landscape. In this environment, strategies should be in place for ‘dollar-proofing’ investments.

What to do about a strong dollar this year

​Consider investing in assets that have a direct correlation with the US dollar, such as commodities priced in dollars or U.S. Treasury bonds. These assets tend to perform well during periods of dollar strength.

​Look for exchange-traded funds (ETFs) that offer currency-hedged exposure to international markets. These ETFs use hedging techniques to minimize the impact of currency movements on investment returns, allowing investors to maintain exposure to global markets without bearing the full brunt of currency volatility.

​Investors should also consider increasing capital exposure to sectors of the domestic US economy that are poised for growth, such as tech, healthcare, and consumer discretionary. These sectors tend to benefit from a strong dollar as they rely less on exports and more on domestic consumption, making them less susceptible to currency fluctuations.

Conversely, sectors with significant international exposure, such as industrials, could face headwinds from currency translation effects.

In addition, investing in real assets such as real estate or infrastructure projects that have intrinsic value and are less influenced by currency movements, could be beneficial. Real assets provide tangible benefits and can act as a hedge against currency depreciation, offering stability in a portfolio during periods of a robust dollar.

​Investors can strategically allocate their portfolios across sectors less vulnerable to currency fluctuations. These include technology stocks – known for resilience and global demand irrespective of currency movements – and healthcare stocks, which typically exhibit stability and global appeal, offering insulation against currency volatility.

​Managing a surprisingly strong US dollar requires strategic foresight and proactive measures to safeguard investment portfolios and build wealth.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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