How the weak dollar may be rescuing your 401(k)
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If the U.S. dollar’s spring slump continues to deepen this week, we can expect to hear the Obama administration try to shore it up with the boilerplate line about how ‘a strong dollar is in America’s interest.’
But a strong greenback definitely is not in the interest of U.S. investors who have money overseas. The broad rally in other major and minor currencies against the dollar since early March has sharply boosted Americans’ returns on foreign assets.
The dollar’s weakness is one reason why the average foreign stock mutual fund is up 14.4% year to date, more than twice the 6.7% gain of the average domestic stock fund, according to Morningstar Inc. data. Foreign diversification is working again for American investors, as it did for most of this decade.
Over the last three months the Canadian stock market has risen 28% in its own currency, but for U.S. investors the gain is a hefty 48% because of our dollar’s dive against the Canadian dollar.
The German stock market is up 28.5% in euros over the last three months but the gain is 43% measured in dollars. The story is similar across most of Asia and Latin America.
The math is straightforward: As the dollar sinks, securities denominated in rising foreign currencies automatically are worth more when translated into dollars.
As noted in this post, just about everything has been working against the buck this spring. As investors have begun to feel more confident about the global economy, some are shoveling money into traditionally riskier non-dollar assets, such as emerging-market stocks.
The dollar also has been victimized by the sell-off in Treasury bonds that was triggered at least in part by concerns about Uncle Sam’s record borrowing binge. And as all that borrowing has fueled worries about potential inflation down the road, some investors have dumped dollars in favor of commodities -- which is why gold is again nearing $1,000 an ounce.
What’s not to like about a falling dollar? It means we have less purchasing power abroad, of course, which will bite if you’re planning a foreign vacation (another good reason for a staycation). And if the greenback weakens enough it could make its own inflation by raising the cost of imports.
For foreign investors, the dollar’s slide means their U.S. assets are depreciating -- which is particularly aggravating to China, our biggest creditor.
Still, the current dollar swoon is just giving back some of what the buck gained in the second half of last year, when the global financial-market meltdown drove many investors into the perceived haven of the U.S currency. The euro, for example, plunged from $1.59 last July to $1.25 in February. It’s now back to about $1.41.
So there’s no dollar emergency at this point. For U.S. investors who held on to their foreign stocks and bonds through the September-to-March crash, the dollar’s slide is just helping to speed the repair job on their mangled portfolios.
-- Tom Petruno