What does it imply when people talk about the “weak dollar” or the “strong dollar”?

The foreign exchange market uses the words “weak dollar” and “strong dollar” to provide a broad overview of the worth and strength of the U.S. dollar compared to other currencies. A currency may be strong or weak, stronger or weaker, and so on.

Strong vs.Weak Dollar

• To put it another way, a strong dollar is one where the U.S. currency trades at or near all-time highs against other currencies. Suppose the exchange rate between the United States and Canada typically ranges from 0.7292 Canadian dollars per United States dollar to 1.0252 Canadian dollars per United States dollar. The current exchange rate is 0.7400 Canadian dollars per United States dollar. In that case, the American dollar is weak, and the Canadian dollar is strong.
• The term “strong U.S. dollar” refers to the dollar trading at an all-time high. When discussing the value of the U.S. dollar over a specific time frame, either “strengthening” or “weakening” may be used interchangeably. As a result of the dollar’s recent rise, the value of one U.S. dollar has increased relative to the other major currencies.
• When the U.S. dollar declines relative to another currency, more U.S. dollars are traded for the stronger currency. For instance, if the dollar’s value between the U.S. dollar and the Nigerian naira (NGN) is 315.30, then one U.S. dollar equals 315.30 NGN. However, if this quotation falls to 310.87, the U.S. dollar has weakened the Nigerian naira because USD 1 now buys less than before.

How a Strong Dollar May Impact Investments

• Shortly after Donald Trump was elected president in November 2016, the dollar’s value rose to its most significant level in years. With investors’ first reactions to former President Trump’s tax and foreign trade proposals, the dollar witnessed tremendous volatility.
• A strong U.S. dollar is only sometimes indicative of an equally robust U.S. economy, despite what market swings may have you believe. As said, this strength is compared to other currencies whose valuations are being lowered to stimulate growth. We also can’t rule out deleveraging’s impact, which occurs when loans are repaid, and the resulting decrease in the money supply causes the
• dollar’s value to rise.

Impact on Multinational Companies

• Companies with substantial market capitalization may suffer if the U.S. currency strengthens. Exports of American products would become more costly to foreign buyers. Long-term damage might be done if the U.S. dollar continues to rise, as some foreign buyers may shy away from American products.
• Although the technology, energy, and essential materials industries are the worst hurt by a strong dollar, many other large-cap firms have seen (and may continue to see) their profits decline due to the strong dollar.

• Businesses including General Motors Co. (G.M.), 3M Co. (MMM), Procter & Gamble Co. (P.G.), Estée Lauder Companies Inc. (E.L.), International Business Machines Corp. (IBM), Chevron Corp. (CVX), and E. I. du Pont de Nemours and Co. (D.D.) have all felt the effects of a strong dollar or are at risk of doing so (DWDP)
• Accenture Plc. United Technologies Corp. (ACN)
• Oracle Corporation (ORCL)

Domestic Companies Insulated From the US Dollar

• Conversely, the U.S. dollar won’t negatively affect local firms. Notwithstanding many assertions to the contrary, the robustness of the domestic economy is often attributed to the job market. However, a better measure of the health of the labor market than the unemployment rate is the proportion of the population actively seeking work.
• The following firms may be worthy of additional investigation if you prefer a long-term strategy to stock picking without worrying as much about a U.S. currency impact:
• Alaska Airlines is a subsidiary of Alaska Airlines Group, Inc. (ALK)
• General Mills, Inc. (DG)
• The TJX Cos., Ltd. (TJX)
• CVS Health Corporation (CVS)
• Insurance provider Allstate Corporation (ALL)
• UHG, or UnitedHealth Group, Inc. (UNH)

The Bottom Line

Foreign exchange (FX) traders and international currency plays, in general, will be affected by the relative strength or weakness of the U.S. dollar. Therefore, when picking stocks, it may be wise to avoid multinationals and focus on those with domestic exposure since they will be less affected by a weakening dollar.