It is essential for Fortune 500 employees to view exchange rates as an opportunity to capitalize and better organize their finances. In late September 2022, an index measuring the U.S. dollar's value against six main currencies (the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc) recorded its highest value in 20 years. Simultaneously, a broader inflation-adjusted index comprising 26 foreign currencies attained its highest level since 1985. Both indices declined marginally but remained near their October highs.
Intuitively, it may appear that a strong dollar is beneficial for the U.S. economy, but in the context of other domestic and global pressures, the effects are varied.
World Standard
Fortune 500 employees should be aware that the U.S. dollar is the reserve currency of the globe. Approximately forty percent of global financial transactions are conducted in dollars, with or without U.S. participation. As a result, foreign governments, global financial institutions, and multinational corporations all hold dollars, ensuring a certain level of demand regardless of other factors.
As investors seek stability and security during difficult times, dollar demand tends to rise. Despite high inflation and predictions of a recession, the U.S. economy remains the world's strongest. Other nations are also fighting inflation, and the strength of the dollar makes their fights more challenging. The United States recovered from the global recession more rapidly, putting it in a better position to withstand inflationary pressures. This information may be beneficial for Fortune 500 employees, as it may help you make decisions that protect your assets more effectively.
Fortune 500 employees should remember that the Federal Reserve's aggressive policy to combat inflation by increasing interest rates has increased demand for the dollar due to the attractive yields on dollar-denominated assets such as U.S. Treasury securities. Several additional central banks have started to raise interest rates in order to combat inflation and improve the yields on their own securities. However, the resilience of the U.S. economy enables the Federal Reserve to raise interest rates more quickly, which is likely to sustain the dollar's advantage for some time.
Exports and Imports The strong currency makes imports less expensive and exports more costly. According to Fortune 500 employees, inexpensive imports are generally beneficial for consumers and companies that use foreign-manufactured supplies, but they can impede the domestic sales of American manufacturers.
At the same time, the strong dollar effectively raises the prices of products sold by U.S. companies on foreign markets, making it more difficult for them to compete and decreasing the value of foreign purchases. Fortune 500 employees can use a U.S. company that sells products worth 10,000 euros as an example. When a euro acquires fewer dollars, the foreign buyer would receive less revenue. Some experts are concerned that the strong dollar will hinder the recovery of U.S. manufacturing following the pandemic. In a broader sense, the ballooning trade deficit has a negative impact on the gross domestic product (GDP) of the United States, which includes imports as a negative input and exports as a positive input.
Fortune 500 employees should take into consideration that a strong U.S. dollar can potentially impact their retirement savings, especially if they have international investments. When the dollar is strong, the value of foreign investments denominated in other currencies may decrease, resulting in lower returns. Conversely, a strong dollar can make international travel and purchases more affordable for retirees. It is crucial for Fortune 500 employees to diversify their retirement portfolio and consult with financial advisors who specialize in international investments to navigate the effects of a strong dollar on their retirement savings.
Overseas Exposure
Large multinational corporations have the greatest exposure to currency imbalance risk, and the stock market has shown signs of a shift from large companies — which have dominated the market since before the pandemic — to smaller firms that may be more nimble and less reliant on overseas sales. Through late October, the S&P SmallCap 600 index has outperformed the S&P 500 index; if this trend persists through the end of the year, it will be the first time since 2016 that small caps have outperformed large caps. The S&P MidCap 400 index has been even more successful. Despite this, Fortune 500 employees must also account for the fact that in the current bear market, improved performance translates to lower losses; all three indexes have experienced double-digit losses through October 2022.
Global Pain
A feeble currency can benefit a nation by increasing the competitiveness of its exports. However, as a result of the weakening global economy, other nations are not reaping these benefits and are paying more for debt and dollar-traded imports such as food and petroleum. Fortune 500 employees should consider how the Federal Reserve is primarily concerned with domestic issues, but is effectively exporting inflation while attempting to control it at home, and that global economic pain could eventually extend to the U.S. economy.
Slowing the Dollar
In the near future, the Fed's aggressive rate hikes may reduce domestic demand for foreign products, thereby reducing the trade deficit and causing the dollar to weaken. The GDP estimate for Q3 of 2022 indicated a narrowing trade deficit, but it is uncertain whether this trend will continue.
As U.S. inflation declines over the long term, the Federal Reserve will likely ease off the accelerator and ultimately reduce interest rates. Employees of Fortune 500 should comprehend how this would allow other central banks to catch up, if they so choose, and increase the desirability of foreign currencies and securities. Lower oil prices (measured in dollars) and/or any reduction in global tensions, such as a lull in the Russia-Ukraine conflict, could also contribute to a decline in dollar demand.
It may take time for any of these dynamics to play out, given their complexity. In the interim, the strong dollar is an indication of the U.S. economy's strength, but it would be unwise to place too much weight on it when making long-term investment decisions. However, this could be an ideal opportunity for a trip abroad.
The timely payment of principal and interest on U.S. Treasury securities is guaranteed by the federal government. Treasury securities' principal value fluctuates with market conditions. They may be worth more or less than the amount paid if not held to maturity.
Employees of Fortune 500 should be aware that all investments are susceptible to market volatility and principal loss. Investing internationally involves risks such as differences in financial reporting, currency exchange risk, and country-specific economic and political risk. This may increase the share price's volatility. When sold, shares may be worth more or less than their initial price. The value of a foreign investment, measured in U.S. dollars, could decline due to unfavorable currency exchange rate fluctuations.
The S&P 500 index is a collection of unmanaged securities deemed to be representative of the U.S. equity market as a whole. The performance of an unmanaged index is not indicative of any particular investment's performance. Individuals cannot invest in an index directly. The past is not indicative of future performance. The actual outcomes will differ.
Imagine you are a seasoned traveler exploring a foreign land. In this vast landscape, the value of your home currency plays a crucial role in shaping your experiences. A strong currency can provide you with the advantage of affordable accommodations, dining, and local purchases. However, it may also make your exports more expensive and put you at a disadvantage when competing with local businesses. Similarly, you can view the U.S. economy as your home turf, and the value of the dollar as the currency that determines its strength. A strong dollar can offer benefits such as lower prices for imported goods and increased stability in global financial markets. However, it may also hinder the competitiveness of American products abroad and impact the returns on your international investments. By understanding the dynamics of a strong dollar and its implications, you can navigate the economic landscape and make informed decisions to safeguard your financial well-being during retirement.
1) MarketWatch, October 19, 2022 (U.S. Dollar index)
2) Federal Reserve, 2022 (Real Broad Dollar index)
3, 8) The New York Times, September 26, 2022
4, 6) The Wall Street Journal, October 17, 2022
5) The Wall Street Journal, October 9, 2022
7) S&P Dow Jones Indices, 2022
9) U.S. Bureau of Economic Analysis, 2022
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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