The U.S. dollar, like the U.S. economy, is suffering from the impact of the COVID-19 pandemic, and that has implications for advisors’ clients’ portfolios.
The dollar index, which measures the greenback against a basket of developed market currencies, including the euro and yen, fell 4% in July, its biggest monthly drop since September 2019, and it’s down about 9% from its mid-March high.
At that time, earlier in the pandemic, global investors rushed into dollar-based securities like Treasurys as safe havens because the U.S. was experiencing far fewer infections and deaths than many other countries, including those in Europe. Now the U.S. leads the world in infections (over 4.6 million) and deaths (near 155,000), though a few other countries have higher rates of both per million people.
The dollar’s decline also reflects narrower differentials in economic growth rates and real bond yields between the U.S. and other countries, largely due to their differences in pandemic trajectories.
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“The dollar benefited from the uncertainty around the global COVID Crisis, but the U.S. will now have to ‘win the peace’ to keep the dollar from losing more than a typical post-crisis decline in value,” writes Nicholas Colas, co-founder of at DataTrek Research.
He expects another 13%-14% decline in the dollar over the next 2 years; Goldman Sachs foreign exchange strategists are forecasting another 5% drop over the next 12 months.
Given these outlooks, which are shared by many other strategists, how should advisors reposition client portfolios?
“When the USD weakens, investors should favor firms with a larger share of revenues generated abroad,” according to Goldman Sachs strategists led by David Kostin.
On a sector basis, that would favor U.S. technology and materials stocks, which derive over half of their revenues from overseas, according to FactSet’s 2020 first quarter Earning Insight report. The energy sector also tends to perform well “during months when the trade-weighted USD fell by at least 1.25%,” according to the Goldman strategists.
International stocks, too, are generally touted as a good investment when the dollar weakens, but not all international stocks or global indexes will benefit from a weaker dollar.