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Since 2004, the U.S. dollar has been constantly devaluating against major currencies and particularly the Euro, which has been preferred in international trade. At the same time, U.S. equities have fallen behind international equities and this trend is expected to continue in the near future based on the fundamentals of the U.S. economy.

The struggle of U.S. dollar in the international money markets has altered the dynamics of economic balance around the globe and has shifted economic power outside the United States. The U.S. investors are experiencing globalization as an economic reality reflected on their investment portfolios and are forced to reallocate their strategies and invest in foreign markets. In the long-run, this globalization will make international investing increasingly important for all investors.

The relative strength of U.S. dollar in relation to investor behavior is analyzed as follows:

A strong U.S. dollar boosts certain sectors of the U.S. economy, such as retail, as the purchasing power of local consumers increases because they can buy foreign goods at lower prices locally. On the other hand, a strong U.S. dollar hurts U.S. exports because American goods are more expensive compared to foreign goods abroad and in the long-run this can cause U.S. corporate earnings to shrink. On the contrary, a weak dollar limits consumer spending because imported goods are more expensive locally, but benefits U.S. corporations because they become more competitive abroad.

In this context, the impact of U.S. dollar on an investment portfolio depends on the amount of foreign investments held in the portfolio. For instance, if a U.S. investor holds a portfolio that is 70/30 allocated in foreign investments and the U.S. dollar is weakening, the portfolio will have high return on investment due to the appreciation in value of the international assets relative to the U.S. dollar. Instead, with a different allocation in foreign investments or with a strong U.S. dollar, return on portfolio would be totally different.

Another major consideration for U.S. investors in regards to U.S. dollar is the broader economic conditions, both in the United States and abroad. At home, U.S. trade and budget deficits are on a constant uprising trend and the struggling U.S. dollar has been unable to stop the inflow of foreign goods flooding the U.S. market mainly from China and other emerging markets. As a result, U.S. budget deficit has kept U.S. investors out of the U.S. market, while inflation is kept rather in line with interest rates. Abroad, emerging economies are getting stronger and stronger, with China on the lead. This will, most likely, put more pressure on the U.S. dollar that is expected to weaken even further, particularly against Euro.

Conclusively, the expansion of foreign economies puts a growing pressure on U.S. economy. Foreign investors, who previously viewed the U.S. economy as the safest market to invest, now shift their preferences to emerging economies or to markets with stronger economies and currencies. Therefore, in order to anticipate these shifts on a long-term horizon, U.S. investors need to consider international investments as well. Rather than focusing solely on the U.S. dollar's value, investors should evaluate the broader economic conditions that affect its value and consequently, impact their investments. U.S. investors that hold international assets are more likely to see higher returns on their investments if foreign currencies appreciate against the U.S. dollar. However, there are also risks associated with investing in different markets, mainly political, country, foreign exchange, and credit risk.

Learn more about this author, Christina Pomoni.
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