The rise and rise of the US dollar have been creating problems for many central bankers around the world. The dollar index, which measures the value of the dollar against many of America’s trading partners has been on a tear. Since the start of the year, it has already risen over 5%.
That wasn’t supposed to happen. Experts were predicting that the US dollar would decline against most major currencies as the American economy weakened and inflation moderated, which would have prompted the US Federal Reserve to start cutting interest rates. That was the plan.
Instead, the US economy has not only expanded, but inflationary pressures have been stubbornly sticky. There is even talk that rather than cutting interest rates, the Fed could hike them.
Experts – probably the same ones that were predicting that the dollar would fall – are now predicting that it could now remain strong, if not rise further. Meanwhile, many central bankers aside from the Fed are growing increasingly concerned. As much as many would like to start cutting interest rates, they have been hamstrung by the rising dollar.
Investors should try to ignore currency fluctuations. Some might advocate hedging to protect against currency declines. But hedging is ultimately a cost. A better idea could be to build a portfolio with good geographic diversification. For instance, investors with exposure to income-generating American equities could naturally benefit from a rising dollar.
Additionally, even local equities that export in US dollars would naturally benefit from a rising greenback. And let’s not forget that what is strong today could easily weaken tomorrow. So, rather than worry about things that we can’t control, a better idea would be to focus on controlling the things that we can.
So, start with finding robust companies that have strong cash flow, manageable debt and a good track record of paying rising dividends. Next, build a properly diversified portfolio that can deliver increasing income.
Investing is not about accurately predicting what will happen but managing risk. Neils Bohr reportedly said that prediction is very difficult especially about the future. He is not wrong. There is nothing wrong with having a view. But just be aware that it is probably wrong!
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