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Weak U.S. Dollar May Mean Higher Interest Rates


Americans generally don’t like the word “weak” attached to anything we do. So how do we to interpret what the weak U.S. dollar may mean for investors?

The dollar’s continued weakness against foreign currencies means their imported goods and services cost more and our exported goods and services go for less.

You can see this as a problem or an opportunity depending on your point of view. The U.S. has a huge trade deficit - we import much more than we export.

This trade deficit means we send a large amount of capital overseas, in addition to jobs. Theoretically, a weaker dollar means our exports become more competitive and this could spur increased production domestically.

Weak Dollar Good?

This may be good news for some U.S. manufacturers, especially those threatened by foreign competitors. However, it they rely on foreign parts or materials, they will have to pay more as the dollar continues its fall.

American consumers will see some of their favorite products rise in price as imports reflect the devalued dollar used to buy them. Foreign governments continue to try to slow the fall of the dollar by investing heavily in U.S. Treasury notes. Their efforts may have slowed the decline, but not stopped it.

What Should Investors Do?

No one knows how long, how far, or how fast the dollar will fall, so preparing an exact investment strategy is difficult.

However, here are some things to consider:

  • Consider investing in companies that have significant overseas sales operations that can take advantage of the currency valuation differences.
  • Look at domestic manufacturers that may become more competitive. The falling dollar is not going to bring back the industrial economy, but it may push some marginally profitable companies into the black again.
  • If you are holding a handful of low-interest bonds, come up with a game plan that envisions rising interest rates. How are you going to adjust?
  • If you are really concerned about the future of the economy and the market, look to gold. Gold has historically been the refuge during time of economic upheaval, but it's value has also dropped dramatically in different circumstances. Only a small part of your holdings should be in gold.

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