Chris’ note: One of the hottest topics on our readers’ minds right now is the U.S. dollar. Folks are increasingly worried it will lose its reserve currency status… and trigger an apocalyptic downturn for the U.S. economy.
But as you’ll hear today from friend of Legacy Brad Thomas, rumors of a dollar disaster are greatly exaggerated.
And even if the dollar weakens versus its rivals, it’s not all bad news. Although it’s counterintuitive, many stocks will benefit.
So, if you’re worried about the dollar… and what it means for your wealth… pay special attention to what Brad has to say. And make sure to stick around to the end. He discusses two stocks that are set to soar if the dollar falls.
The U.S. economy… and our way of life… is doomed.
At least that’s what many in the media are claiming. And dollar doomers are a dime a dozen on social media.
These folks see a coordinated effort to subvert the U.S. dollar as the world’s primary reserve currency.
Take the BRICS countries – Brazil, Russia, India, China, and South Africa. They’re creating a gold/rare earth metals-backed common currency to replace the dollar for trade.
Meanwhile, Russia has completely exited the dollar payments system… and has made the Chinese yuan its main reserve currency.
And India now trades with 18 countries – including Russia, Germany, Israel, and New Zealand – in its currency, the rupee, instead of the dollar.
Seeing these headlines, it’s easy to be scared.
But when we allow fear or greed to inspire our investing decisions, we’re more likely to make mistakes.
I’m a data-driven investor. And looking at the data, I don’t see much evidence of the dollar losing its reserve status any time soon.
In fact, in recent years, the dollar’s strength has risen.
It’s all in this next chart of the U.S. Dollar Index. It tracks the exchange value of the U.S dollar against a basket of six major trading partners’ currencies.
As you can see, the dollar is up 11% over the past five years.
And as I’ll show you today, even if the dollar weakens, there’s no reason to panic. It’s actually good news for many of the stocks in your portfolio.
How the Dollar Became Top Dog
The U.S. dollar became the world’s reserve currency after the Bretton Woods Agreement between the U.S. and 43 allied nations in 1944.
And it’s easy to see why the dollar became top dog.
It had been a major exporter during the war. So, the U.S. had most of the world’s gold reserves.
And diminished reserves in Britain, France, and the other allied nations meant returning to the classic gold standard would be impossible.
The closest thing to gold was the U.S. dollar. So, that’s what other nations pegged their currencies to.
Since then, the U.S. has moved to a fiat standard. It no longer backs dollars with gold. But it remains the world’s primary reserve currency.
This surprises some people.
But the U.S. continues to be the biggest, most advanced economy in the world. It’s also the world’s most dominant military force. And history shows this is ultimately what conveys reserve status on a currency.
Before the dollar, the British pound was the world’s reserve currency. This corresponded to the time when Britain was the world’s foremost military and naval power.
Same goes for the Spanish real. It was the world’s reserve currency when the Spanish Armada ruled the waves.
But let’s say I’m wrong… and the U.S. dollar slips in value versus its rivals again.
Far from being a catastrophe, it would be a boon for U.S. companies doing business in foreign countries.
Currency Headwinds
For decades, U.S. firms have pursued growth in international markets.
For instance, no matter where you go in the world, you’ll see people drinking Coke and using iPhones.
Today, there are many U.S. multinationals that generate most of their sales in overseas markets.
There are 334 million people in the U.S. and roughly 8 billion people on Earth. So, the international customer opportunity is significantly larger than the domestic one.
There’s one problem – the U.S. dollar exchange rate.
As great as it is for U.S. companies to have a large market share across the world, their earnings results are in U.S. dollars.
And when the dollar is strong, that weakens the sales and earnings these companies have earned abroad.
That’s why we’ve heard so much talk of “currency headwinds” lately.
For instance, in 2022, the U.S. dollar rose 5% versus the euro.
This meant every euro a U.S. multinational earned fetched fewer dollars.
Take Coca-Cola. During the company’s fourth quarter earnings report, the word “currency” came up 104 times.
Last year, its earnings-per-share – a key measure of profitability – dropped by 10% in U.S.-dollar terms thanks to the weakness in the euro.
Microsoft faced similar problems in 2022.
Its net income was down by 8% last quarter due to currency headwinds. That’s $1.9 billion in lost profits.
Ignore the Scary Headlines
So, the next time that you see a scary headline, or hear discussion about the dollar’s demise at a cocktail party this year, don’t panic.
A weaker dollar will lead to higher profits for many of the stocks in your portfolio.
And the stocks with the highest exposure to international sales will be poised to benefit most.
Dozens are blue-chip stocks that have been hurt by the strong dollar in recent years.
Microsoft (MSFT) is a recommendation at my Intelligent Income Investor advisory. But it’s up 17% since I added it to the portfolio last June. And it now trades above my buy-up-to price.
Coca-Cola (KO) is not an official recommendation of mine. But it’s a good place to start your search.
It gets roughly 65% of its revenues from outside the U.S. It pays a 2.9% annual dividend. And it’s raised its dividend every year for the past 60 years.
And as my regular readers will know, only the world’s best-run companies achieve this “dividend aristocrat” status.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
P.S. My strategy isn’t flashy… But it is a reliable way to protect and grow your wealth no matter what the economy throws our way next.
All you need is a small portfolio of unique, dividend-paying stocks with long histories of weathering – and thriving throughout – tough markets. My team and I put together a presentation with everything you need to get started.
Go here to access it.