Ways to Play the Weak Dollar

With the dollar down against a variety of currencies as of late, there are a lot of interesting opportunities to take advantage of if you know which way things are headed.

First, if you’re expecting a continuing weaker dollar, who benefits from this? Obviously, tourists from Europe and Canada where the dollar is near all-time lows against the Euro and the Loonie. But beyond this simplistic viewpoint of currency, what about the businesses that have their cost in dollars but their revenue in other currencies? One of the little known idiosyncrasies of the commodity markets is that the rising oil prices are traded only in dollars on the NYMEX and CBOT. So while the U.S. futures market has seen near-record level prices for light sweet crude, most of Europe has been protected from these rising costs by the weakening dollar and will continue to see the benefits if the dollar remains weak and/or the price of oil drops. An example of this would be a Canadian airline that converts its cash into dollars to buy gas for its planes. While its revenue remains the same, oil purchased a few months back at $70 USD/barrel while the Loonie was at 0.9 Dollars would be near $77.8 Canadian, but even at $80 USD/barrel now with the Loonie at just above parity with the Dollar is around $79.2 Canadian. Compared to US airlines that now have a 15% increase in one of their costs, the Canadian airline has had a less than 2% increase in the same per unit cost item.

At a macroeconomic level, the weak dollar is still good for many US companies. Tourism related companies will receive an influx of customers from those in other countries that now find their currency strong against the dollar. Exports will also be on the rise for the same reason and will also narrow the trade gap. These two elements should keep job growth strong and help many of the companies that export goods around the world. But, for companies that sell their goods in dollars and have cost in their national currency (other than the Dollar), the weakening dollar will erode earnings. Companies like EADS and foreign petroleum companies tend to have costs in their own currencies since they pay local workers and make capital expenditures in foreign countries. But most of their products are sold in Dollars or exported to the US, where the weakening dollar makes their products worth less relative to their costs.

What’s an investor to do? Invest in multinational corporations based in the US. Companies that operate in my countries are hedged against moves in the dollar and benefit from stronger foreign currencies when they have to convert it back to Dollars to report their earnings. Companies like YUM Brands (YUM) with strong foreign growth and significant foreign earnings receive an extra kick coming earnings season. In its 3Q report YUM stated a “Favorable foreign currency conversion impact of about $0.02 EPS“, which equates to around $10-million Dollars in additional earnings despite missing growth targets abroad and declining sales at home.

But what if the Dollar rebounds against these currencies? The clear choice would be in domestic companies that do a lot of importing of goods. Oil companies would benefit largely due to decreased costs and many of the already hot tech stocks will be getting a boost from cheaper hardware made abroad. While these sectors are not necessarily hurt due to the weakening Dollar, any surprising rebound in the Dollar will have a highly beneficial impact on their bottom lines. I’m not going to explore this scenario much further since the Fed rate cuts do little to bring any strength back to the Dollar while other countries, like New Zealand, continue to raise their rates.

An interesting path to take regarding currency plays is to invest in areas where currencies are pegged to the Dollar. China, for instance, is pegged to the Dollar and as such investments in there neither benefit nor are harmed by currency fluctuations. So there is little to worry about if you foresee continued growth in China. While growth there continues in double-digit GDP gains, there are also a lot of other underrated markets that are also pegged to the Dollar. While the bull market in Asian growth is far from over, there is also a lot of Latin American growth that is going unnoticed. Countries like Argentina, Panama, and Ecuador are pegged to the Dollar and have also seen their GDP growth increasing lately. Be wary, though, since a lot of their growth follows oil exports, mining, and global shipping. Latin America could be an interesting play either way due to lower exposure as a less “sexy” investment area.

Whatever your views on the future of the Dollar, just remember that somewhere there is a market that’s growing.

I own shares of YUM and NMX.

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6 Responses to Ways to Play the Weak Dollar

  1. warren says:

    very insightful entry. thinkin in terms of different currencies takes some getting used to..

  2. Elaine says:

    The yuan isn’t pegged to the dollar anymore, and if/when the dollar collapses, it’s likely that the yuan and other asian currencies will go with it.

  3. tao2death says:

    While technically true, the yuan is only allowed to trade within a narrow range versus the dollar and thus cannot rise in value significantly day-to-day like the Loonie, which has increased in value over 5% versus the dollar since the writing of this article. A dollar “collapse” is exceptionally unlikely since that would require a long-term global depression due the United States’ large foreign debt. The only modern equivalent would be Russia defaulting on their government debt in ’98 and this didn’t have as global an affect since most countries did not carry quite as much of the Russian currency. More likely the economies would collapse before the currencies.

  4. Elaine says:

    That is true. I think I will go to switzerland and open a swiss bank account.

  5. Plaggs says:

    Sorry to inform you of this but the yuan as of 2005 is not pegged to the dollar as Elaine says. As a matter of fact congress has been trying to get China to increase the value of the yuan against the dollar by at least 20%. This does make Yum a good play though, but get your facts right.

  6. bumscientist says:

    The yuan is not pegged to the dollar tit for tat, but the appreciation is heavily limited by the Chinese government. It is capped by the range it is allowed to trade. The currency is not being traded in a free market environment hence Paulson’s desire to have the yuan appreciate, so we can sell China more stuff.

    Also, China may let the yuan appreciate more, because oil is traded in dollars. When oil goes up, China loses out just like the US unless their currency appreciates.

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