Dollar Doldrums or Delight?

When the value of the US dollar achieved parity with the Canadian dollar in September 2007 for the first time since 1976, and set a record low against the euro, the media hardly embraced it as good news.*

But it was a mere five years ago that the financial media were bemoaning the United States strong dollar policy for the damage it was doing to our manufacturing, exports, and tourism. So, is it surprising that the recent dollar weakness didn’t elicit cheers from Wall Street? Not really.

The fact is, no matter what happens to the dollar, there are parties who stand to gain and parties who stand to lose. The real question is how a weak dollar may affect your portfolio.

Bad & Good NewsHeadlines that trumpet bad news are an easy distraction from what’s really going on. This might come as a surprise, but the financial markets alone don’t dictate how your portfolio performs. The investments you hold dictate how your portfolio performs. There are upsides and downsides to almost every event. The key is to be positioned to take advantage of the outcomes.

Hurricanes cause havoc for residents of affected areas, but they also create opportunities in construction and housing. Low interest rates can impinge on bond investors, but they can also create favorable conditions for businesses by making capital more affordable for operations and investment.

High oil prices are bad for drivers, but they also create incentives for oil exploration, new technologies to make every barrel of oil go farther, and the development of energy alternatives.

So it is with the strength of the dollar. A weak dollar is bad news for importers because it drives up prices for overseas goods, but good news for exporters because it makes their goods more affordable for overseas buyers. Although higher import prices might seem like bad news for consumers, they can benefit U.S. manufacturers because their goods and materials become more attractive and may help drive sales growth. Manufacturers, in turn, may be more likely to purchase equipment and hire more workers in pursuit of further growth. More workers mean more consumers with cash to spend, which can result in economic growth.

The Larger View

This is not to say that you should ignore fluctuations in the dollar, for there are indeed a number of downside risks that must be managed. But try to look at the bigger picture. Will a weaker dollar affect you? Almost certainly. Will the effects be negative? That’s not so certain. It is times like these when asset allocation and diversification strategies prove their mettle.

Diversification and asset allocation do not guarantee against loss. They are methods used to help manage investment risk. And right now, we are facing risks associated with a weaker dollar. Just remember that the only reason to accept risk is in the pursuit of potential investment gains.

* Bloomberg, September 21, 2007

Lawrence B. Keller is the founder of Physician Financial Services, a company dealing exclusively with the financial needs and concerns of members of the medical profession. He has spent the last 16 years providing suitable insurance and investment products and services that best suit each individual doctor’s needs and concerns. He welcomes comments at lkeller@physicianfinancialservices.com or 800-481-6447.