ETFs To Gain & Lose From A Strong Dollar

After taking a beating in recent weeks, the dollar rebounded strongly on signs of progress in trade negotiations and speculation of stimulus globally to shore up economic growth. Notably, the Bloomberg dollar index climbed to its highest level of this year.

In the positive trade talks, Washington extended a 90-day temporary license allowing China’s Huawei Technologies to continue doing business with U.S. firms. Major central banks across the globe are stepping up efforts to prop up slowing economic growth that has eased global recession concerns and are in turn driving dollar higher.

China’s central bank unveiled a key interest rate reform to lower borrowing costs for companies while Germany is ready to potentially free up 50 billion euros ($82 billion) of extra spending. The European Central Bank is expected to cut rates in September and resume a bond-buying program while the Federal Reserve might signal further rate cuts this year. In the rate cuts stampede, Mexico is the latest country to cut interest rates last week.

Against such a backdrop, the bullish trend in the dollar is likely to continue at least in the near term.

Strong Dollar: A Boon & Bane

A strong dollar will lead to a rally in the stock market as it attracts foreign money from investors seeking dollar-denominated returns instead of their home currencies. Additionally, energy cost in America decreases with a strong dollar, thereby lowering industrial cost and increasing profits, thereby propelling the overall economy.

While a strong dollar provides an edge to the domestic-focused companies, it makes dollar-denominated assets expensive for foreign investors, making U.S. multinational products uncompetitive and leading to lower demand and profits. As such, companies having a higher percentage of international sales will likely underperform in a rising dollar environment. Moreover, commodities, emerging markets, and gold mining stocks are also hurt by a strong dollar.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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