The mighty dollar has had a rough year.
Since its highs back in March, the U.S. dollar has fallen 11% and is now at lows not seen since April 2018.
“We are still in the early innings of dollar depreciation,” Pimco portfolio manager in Hong Kong, Stephen Chang, said recently. “An important factor to watch is whether a phrase four fiscal stimulus package will be passed in the U.S., as otherwise the discontinuity of fiscal support will lead to a significant risk-off and USD bullish event.”
The dollar has come under increasing pressure as the Trump administration has struggled to gain control over the coronavirus pandemic and as the Federal Reserve has pledged unlimited liquidity to support the battered U.S. economy.
While Democrats and Republicans have been trying to break an impasse over a new coronavirus stimulus bill, investors are already concerned about rising inflation given the record stimulus bill Congress passed back in March. The mighty dollar could also face further weakness given that Federal Reserve Chairman Jerome Powell said last week that the central bank is now comfortable with higher levels of inflation, implying that U.S. interest rates will stay lower for longer.
“Under the Fed’s new regime, even once the U.S. economy begins to recover, markets will have far less reason to expect higher rates in the U.S.,” said Ranko Berich, head of market analysis at Monex Europe Ltd. in London. “As such, we are likely to see a far less responsive U.S. dollar to any possible economic upswing.”
With the dollar likely to remain depressed, sectors with high exposure to international markets—including materials, technology, and consumer staples—should see a boost.
JC O’Hara, chief market technician at MKM Partners, says you can already see this playing out in some of the stocks in these sectors.
“When you get down to the individual stocks, you want to find those companies who derive a good portion of revenue from overseas,” O’Hara said. “Off the March low, we [saw] a basket of S&P 500 stocks with above average revenue from international markets outperform. That basket returned 61%. Now that compares to the S&P, which over that same time period was up 53%.”
“The moral of the story is, you want to go hunting in a weak dollar environment for those companies that have good foreign earnings,” O’Hara added.
Washington Crossing Advisors portfolio manager Chad Morganlander said he’s watching the industrials space for opportunities.
“Because of the weak dollar environment, these industrials have, from a valuation perspective, been trading quite cheaply,” Morganlander said. “And as you start to go past 2021 into 2022, we believe that the industrials valuations will go up considerably.”
“We believe for investors that have a two- to three-year time horizon,” Morganlander said, “you can do quite well and also benefit from this weak dollar environment.”