By Jonnelle Marte
Stock markets tumbled this week as European debt woes returned to the forefront and the Federal Reserve indicated it would be taking a more hands-off approach. But investing pros say one asset class is emerging from the tumult as a clear winner: the U.S. dollar.
The greenback has been helped by recent positive economic data, including the labor market improvements and stronger spending that helped lift stocks earlier this year. Advisers say the gains should continue over the next several months as recession worries brewing in Europe push more investors into U.S. stocks. That could help the dollar increase against European currencies like the euro and the British pound, says Paul Christopher, chief international strategist for Wells Fargo Advisors. “It’s a flight to safety,” says Scott Brown, chief economist at Raymond James.
Investors are also more bullish on the dollar after lowering their expectations for another round of quantitative easing, which typically involves the Fed printing money to buy more bonds. The end of such programs could limit the money supply and make the dollar more valuable, says Robert Russell, president of Russell & Company, a wealth management firm in Dayton, Ohio.
That said, many investing pros don’t expect the dollar’s reign to last. In the long term, advisers say the dollar is likely to be outpaced by currencies from emerging-market countries in Latin America and Asia that are experiencing more robust growth. That’s why some investors should also have a stake in the Brazilian real, Mexican peso and the Indian rupee, among other currencies, says Christopher. And a shift in economic conditions could encourage the Fed to roll out another stimulus program, which could undo some of the dollar’s recent advances, he says.
But that doesn’t mean investors can’t benefit from the dollar’s strength in the meantime. “There may be some shorter-term opportunities to exploit,” Christopher says. For instance, investors who are bullish on the dollar can pile into U.S. stocks and avoid European equities. As the dollar gains against the euro that should help U.S. equities outperform European markets, he says. Some investors may want to make a more direct bet by using exchange-traded funds to short the euro and go long the dollar, says Russell. And within U.S. stocks, investors should target companies that import heavily from other countries, such as retailers and auto manufactures, because they should be able to buy goods for cheap with the help of a stronger dollar, he says.
Investors who want to profit from the stronger dollar might also cut back on their exposure to commodities, such as precious metals, oil, agriculture and others, which tend to rise when the dollar falls, advisers say. Consider cutting back about one percentage point and putting that money into U.S. stocks, says Christopher. Those who don’t want to sell their commodities can use ETFs to short precious metals like gold, says Russell.