Investments in foreign assets benefit from a weaker domestic currency. For example, American investors can benefit from a declining dollar by buying foreign stocks whose assets will appreciate with their home currency. In anticipation of a declining dollar many American investors select foreign stocks to hedge their dollar denominated investments. This strategy is not fool-proof, and should it be carefully considered.
The owners of assets that are bought and sold in foreign currencies benefit when that foreign currency appreciates against the owner’s home currency. This effect makes international stocks, as a group, an effective hedge against the U.S. dollar. U.S. investors benefit from the performance of these foreign corporations and from any appreciation of the foreign currency against the dollar when they sell their holdings and exchange the proceeds for dollars.
U.S. investors can also hedge their dollar exposure by investing in corporations that buy from suppliers using dollars or are paid by customers in foreign currencies. Corporations that source resources in the United States will have lower costs from an international perspective. Many multinational companies, such as Procter & Gamble and McDonald’s, have benefited from a weaker dollar. More than half of P&G’s sales and two-thirds of McDonald’s revenues are generated overseas, and these revenues in foreign currencies are worth more when the dollar weakens.
American-based exporters also benefit from a weaker dollar. If foreign currencies appreciate against the dollar, the goods and services of American corporations will be cheaper for customers. American-made goods become more competitive in the international market, which boosts the sales of companies that are heavily dependent on export activity.
Foreign Stock ETFs
Many exchange-traded fund vehicle invest exclusively in foreign stocks, which are available to retail investors. International fund investing mitigates the risk of individual stock performance while maintaining exposure to foreign currencies.
Risk Works Both Ways
American investors should recognize the special risks associated with investing in foreign stocks. First, foreign currencies may depreciate against the dollar, resulting in losses. Second, there are no guarantees that foreign stocks or foreign economies will perform well. Many foreign stock markets -- especially those in emerging economies -- have low transparency and unfamiliar regulations. Changes in the political stability of these countries also negatively impact the American investor.
Joe Escalada is a financial analyst. He earned a Master of Business Administration from the University of California at Davis and has passed all three Chartered Financial Analyst examinations. He has a bachelor's degree from the California Institute of Technology.