THE DOLLAR has been losing ground against major currencies recently, and while that's bad news for consumers with a taste for imports, it can mean opportunities for investors.
On the upswing for seven years, from April 1995 through February, the dollar rose 43 percent in value measured against a basket of major currencies, according to the Federal Reserve. Since then, it has dropped about 6.5 percent.
"Mainly, it got too strong. It's sort of a seven-year itch. Seven fat years and seven lean years. The fat years are over," said David Wyss, chief economist with Standard & Poor's in New York.
The decline is blamed on numerous factors, including a rising U.S. trade deficit and a drop in foreign investments. That drop means fewer people overseas are buying dollars to invest here, so demand for the greenback has fallen and triggered a decline in value, experts said.
Foreign investors are pursuing higher interest rates in other countries.
They also are concerned about growing accounting scandals at U.S. corporations, experts said.
"This is problematic. It tells foreign investors what they've been observing in the United States, which has been truly spectacular in the past decade, is probably not all that it was cracked up to be and casts doubt on the veracity of future earnings," said Richard DeKaser, chief economist with National City Corp. in Cleveland.
Currency shifts tend to last several years, rather than months, experts said. Some predict that the euro, now worth about 94 cents, will be at $1 in a year. Yet the prospect of a weaker dollar isn't raising much concern as long as the slide remains gradual.
"The risk to investors is that an abrupt, significant fall in the dollar can hurt the growth prospects in the United States and can be inflationary because the dollar isn't buying what it used to," said Jonathan Murray, senior vice president of investments at Legg Mason Wood Walker Inc. in Baltimore.
The weaker dollar offers investment opportunities. Investors should never time the market, let alone currency moves. But for those with no foreign securities, and thus no exposure to other currencies, "it might be a good time to get some diversification," said Gregg Wolper, senior fund analyst with Morningstar Inc., a financial research company in Chicago.
For years, foreign investors benefited doubly by putting money into the U.S. stock market. First, they reaped healthy returns on stocks. Later, they were able to exchange their increasingly strong dollars for more of their home currency.
The opposite occurred for their U.S. counterparts investing overseas.
"The strength in the U.S. dollar has taken away 5 percent per year over the last five years from international equity returns," said Kurt Umbarger, a portfolio specialist at T. Rowe Price International in Baltimore.
Now the tide is turning. "The benefit of a weaker dollar for those investing internationally is they can see a boost to their returns as a result of that," Umbarger said.
When looking for opportunities abroad, Umbarger favors Europe. Corporations there have been restructuring, making acquisitions and shedding unprofitable businesses, and their balance sheets are healthier than they were five or so years ago, Umbarger said.
On top of that, the stock prices of European companies are generally lower than those of U.S. companies relative to projected earnings, he said.
He also likes emerging markets in Asia, particularly South Korea and Taiwan. "These markets are still trading at reasonable valuations," Umbarger said.
Legg Mason's Murray suggests that long-term investors have at least 5 percent of their stock portfolio in foreign equities, although those with a high tolerance for risk might want to invest as much as 25 percent.
For small investors, the best way to invest in foreign stocks is through a mutual fund. Wolper suggests a broad international fund that has exposure to a variety of markets, although they tend to hold a greater percentage of European stocks.
Andrew Clark, a senior analyst with Lipper, a fund analysis firm, said now is also good time to invest in international bond funds that invest in developed countries' short-term debt. Such funds are benefiting from higher interest rates overseas, he said.
Investors don't have to leave home to reap rewards. "The U.S. is still a very good place to invest," Umbarger said.
Earnings might rise for U.S. manufacturers that rely on exports, now that their products are cheaper for foreign consumers. But it might take time for exporters to see an uptick because they are operating under old contracts, said Ashraf Laidi, chief currency analyst for MG Financial Group in New York.
"We need to see the dollar coming down by around 10 to 12 percent and stay this way for six to 12 months. Then that will begin to really help exports," he said.
Multinational companies based in the United States but deriving a sizable chunk of their revenue from overseas operations, such as pharmaceutical and food companies, will benefit when they exchange their foreign currency and are able to get more U.S. dollars, experts said.
Even U.S. manufacturers that don't export could benefit if they have had to keep their prices down in recent years to compete with cheaper imports. Now that the cost of imports is rising, those companies will be able to raise their prices and remain competitive with foreign goods.
The risk is that rising prices can trigger inflation, which in turn could prompt Federal Reserve policy-makers to boost interest rates. And that would dampen the U.S. stock market.
U.S. companies likely to be hurt by the weaker dollar are small ones that rely on imports. Costs will also rise for U.S. manufacturers that heavily import components and materials for their products.
Technology companies have been big exporters in the past, but they aren't expected to benefit because of the weak demand for their products, said Charles Carlson, chief executive officer of Horizon Investments Services in Hammond, Ind.
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