How To Play A Weakening US Dollar (Part 1)

Despite inflation reaching a nearly 4-decade high in November’s CPI report and an accelerated monetary tightening policy from the Fed, the US Dollar (DXY) continues to strengthen. This counterintuitive domestic currency appreciation is due to several factors:

  • Fed Chair Jerome Powell’s central banking regime is much more laissez-faire (accommodative to public markets) compared to other major central bank administrations, which are taking on more hawkish monetary policies. The Bank of England was the first major central bank to initiate liftoff last week, and the European Central Bank (ECB) looks like they may follow suit, which is at least 3 months out for the Fed. This relative monetary accommodation makes the US dollar more attractive.
  • The US dollar is tied to US assets, which have also risen in relative allure.
    • The recent fear-fueled rush to US Treasuries, which is considered the global market’s “risk-free” bond, not to mention yields are much stronger than most developed nations.
    • Our innovation-fueled economy is looking at healthy 2022 growth coupled with the Fed’s accommodation, causing US equities to look ripe for a buy at their recently discounted valuations.
    • The US dollar backs most commodity futures contracts. Excessive inflation has elevated volatility across all commodities pushing more global companies to hedge in the futures market (this volatility also brings in more global traders).
  • At the end of the day, the safety of the US dollar and the asset classes it opens up to investors and corporations is the reason for its recent buoyancy.

The US dollar has been ripping higher since the Delta-variant showed up this summer, but its relative buoyancy to other fiat currencies looks to be at risk as we head into 2022. Analysts are focused on monetary policy sentiment from both the ECB and the Fed for clues regarding currency risks.

The US dollar may be at risk of 5%+ depreciation in 2022 as the slowly recovering European economies scamper out of the pandemic’s grasp. Depreciation of the US dollar would put further pressure on this country’s already highly inflationary environment, making foreign product/material sourcing relatively more expensive.

However, there are notable benefits to a declining domestic currency. 

The upsides to a weakening US dollar can be characterized by elevated international business activities (travel & investment) and more demand for US goods (tailwind for net exporters). Some of the largest US exporters include industry leaders such as Apple (AAPL), ExxonMobile (XOM), Caterpillar (CAT), and Ford (F).

Cryptocurrency’s like Bitcoin (BTC) have ostensibly replaced the antiquated gold trade in recent months as the prefered way to hedge against swelling inflation. There may be a profitable play in well-positioned digital currencies as investors turn towards the future of money in the face of a depreciating fiat currency. 

Some unique investment opportunities are revealing themselves on this notion of a 2022 dollar depreciation.

Check out Part 2 of this series for my top picks to play the seemingly imminent weakening of our leading economy’s ubiquitous currency.

Final Thoughts

When assessing beneficiaries of a weakening domestic currency, focus on where the company in question conducts most of its business and where they source materials (if at all). Net exporters are the easiest to evaluate as clear-cut victors of a weakening dollar, assuming their primary trading partners aren’t in the same depreciating boat.

Domestic travel & leisure stocks can also benefit from a weakening currency. Foreign travelers are increasingly enticed to visit a destination as the relative exchange rate drops.

Happy Trading!

Dan

For more headline-fueled trades and insight, check out Dan’s daily market commentary in the Headline Trader portfolio.

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Exxon Mobil Corporation (XOM): Free Stock Analysis Report
 
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