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Jan. 5, 2015, 11:37 a.m. EST

Here’s how a strong dollar will hurt investors in 2015

But you can revamp your portfolio to gain protection

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By Jeff Reeves, MarketWatch


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Large U.S. companies are forgoing bigger sales because of the strong dollar, which makes their goods cheaper abroad, hurting profits.

Over the holidays, I had a few conversations about investing with friends and family.

It’s always interesting to see what misconceptions “normal people” hold about investing strategies. And one of the biggest misunderstandings, I found, regards the danger posed by a strong dollar.

Admittedly, it’s a bit counterintuitive. It seems natural for Americans to want a strong currency. And, of course, there are specific strategies that can take advantage of a strong-dollar environment.

But in 2015, one of the biggest risks to most investment portfolios is the continued weight of a strong dollar holding back key asset classes. And investors who don’t understand or acknowledge this could pay the price.

Here’s a basic rundown of the threat posed by the continued strength of the greenback, and how investors can protect themselves.

Strong dollar hurts large U.S. companies

Many of the largest U.S. companies are actually reporting smaller sales numbers because of a strong dollar. That’s because they do a high volume of business overseas, and since those sales are recorded in currencies that are comparatively weaker, it’s like these multinationals are actually selling their goods at a discount.

Consider that conglomerate 3M /zigman2/quotes/205029460/composite MMM -2.13% recently said a strong U.S. currency will actually result in a reduction of total sales by 2% to 3% in 2015 .

And it’s not just the top line taking a ding. McDonald’s /zigman2/quotes/203508018/composite MCD +2.14% said currency pressures could reduce fourth-quarter earnings by up as much as 7% . At Coca-Cola /zigman2/quotes/209159848/composite KO +1.63% , the outlook is even worse, with the company warning that operating income could be hit by 9 percentage points in the fourth quarter.

In short, the more business you do overseas, the more you are hurt when you take those sales in weak currencies and convert them into greenbacks.

Strong dollar hurts commodity stocks

Another significant area affected by a strong U.S. currency: dollar-denominated commodities, from steel to crude oil to soybeans.

As the dollar rises in value versus other currencies, commodity prices fall because you get more bang for your buck. Instead of thinking about the dollar as fixed and commodity prices as fluctuating, think of it this way: If you (or any global buyer) can buy one barrel of oil for $100 today but then the dollar keeps increasing in value, you might be able to buy two barrels of oil for that same $100 in a year or two.

This sounds great for motorists, who like cheap gas. But what if you’re an oil driller or refiner with a $600 million deepwater rig you took a loan out on, and big monthly payrolls to meet regardless of crude oil prices?

Now apply that same pain to miners with expensive digging gear that extract increasingly cheap metals, and farmers who get increasingly less for their harvests despite spending big on seeds, pesticides and agricultural equipment.

/zigman2/quotes/205029460/composite
US : U.S.: NYSE
$ 143.83
-3.13 -2.13%
Volume: 4.20M
May 20, 2022 4:03p
P/E Ratio
14.98
Dividend Yield
4.14%
Market Cap
$81.85 billion
Rev. per Employee
$371,926
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/zigman2/quotes/203508018/composite
US : U.S.: NYSE
$ 233.91
+4.91 +2.14%
Volume: 3.21M
May 20, 2022 4:00p
P/E Ratio
24.71
Dividend Yield
2.36%
Market Cap
$173.00 billion
Rev. per Employee
$118,819
loading...
/zigman2/quotes/209159848/composite
US : U.S.: NYSE
$ 60.98
+0.98 +1.63%
Volume: 29.13M
May 20, 2022 4:00p
P/E Ratio
25.72
Dividend Yield
2.89%
Market Cap
$264.35 billion
Rev. per Employee
$508,608
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