Riding With The Currency

would have resulted in an additional gain of 10% before transaction costs.” This additional gain is the second punch — currency appreciation. With both the equity and the currency increasing over the year, a U.S. investor in this example would have received combined pretax earnings of 18.5%. In other words, a $10,000 investment would have grown to $11,850.

One of the easiest and safest ways to diversify globally is through international mutual funds. In fact, according to AMG Data Services, investors have been pouring money into overseas funds at a much faster rate this year than U.S. equity funds.

WHEN THE DOLLAR IS STRONG
In 2004, the U.S. dollar increased slightly in value against major currencies, but compared to its historical positioning, it is not yet strong. When the dollar is described as strong, it buys more units of a foreign currency than it did before. For U.S. consumers, this translates into lower prices for foreign goods and services. For Brandon of HBF Collection, returning to Italy to expand his shoe product line becomes a viable option. Likewise, Anderson’s honeymoon in Europe and other trips abroad would be less expensive. U.S. investors also get a deal on foreign stocks or bonds because prices are relatively lower.

But everyone doesn’t benefit in a strong dollar environment. The price of American products overseas goes up when the dollar gets stronger. This makes it more difficult for U.S. exporters to compete in foreign markets. It also dampens tourism in the U.S. since it’s more expensive for foreigners to travel and purchase items in the United States.

A weak U.S. dollar works to enhance short-term returns for investors in U.S.-based mutual funds that invest internationally. This situation was reverse during much of the 1990s when the dollar’s appreciation gave a boost to returns for Japanese and European investors who put their money in U.S. assets. There is no way for investors to ensure that they are always on the positive side of s
hort-term currency effects, since it can be difficult to predict when the dollar will go up or down in value. For this reason, Davis of Vanguard advises investors to diversify across asset classes as well as between domestic and international instruments. So no matter which way the dollar goes, your total return is more likely to go up.

2004 cost of living comparisons in U.S. dollars
In most cases, the weak dollar makes products more expensive in Europe and Japan. But, as this chart demonstrates, factors such as labor costs and consumer demand may make some products less costly despite the weakness of the American currency.

SOURCE: MERCER