Best Mutual Funds for a Strong US Dollar

How the U.S. Dollar Affects Investments and Which Are Best for Hedging

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There are some mutual fund types that tend to perform better when the value of the U.S. dollar is appreciating, or at least strong while other currencies in the world are not as strong or weaker in relation. Find out which types of funds do best when the U.S. dollar is strong.

How the U.S. Dollar Affects Investments

The easiest way to understand how the U.S. dollar can affect investments is to think of how corporations make profits. In simple terms, if they can sell their products for more than it takes to make them, they have a profit.

But if the corporation is a large U.S. exporter, and if they go to sell their goods overseas, they'll make less profit when the dollar has appreciated (or is stronger in relation to other currencies). That's because the foreign purchaser of the American-made goods will not want to use more of their currency to buy the goods, just because the dollar has appreciated. Therefore, according to this theory, the U.S. exporter will make less of a profit.

Best Types of Funds for a Strong Dollar

So when the U.S. dollar is stronger in relation to foreign currencies, with all other things being equal, U.S. stocks of large exporting companies generally don't perform as well as large foreign countries exporting to the U.S.

With that in mind, here are the best types of funds for an appreciating dollar:

  • Large-cap International Stock Funds: The largest of foreign companies tend to be exporters and they can perform well in a strong-dollar environment. Therefore, mutual funds that invest in large, non-U.S. companies may benefit from this environment.
  • U.S. Mid-cap Stock Funds: If an investor wants to diversify away from large-cap stocks, or if they want to invest more aggressively, they can use mid-cap stock funds as an alternative to domestic large-cap stock funds. Smaller corporations are not typical exporters, which is why mid-caps can be better than small-caps in a strong dollar environment.
  • Consumer Cyclicals Sector Funds: These funds invest in consumer "discretionary" stocks, which are of companies that sell products and services when the economy is strong. When the U.S. dollar is strong, the U.S. consumer is also usually spending more on those discretionary things that are not necessary, such as vacations, cars, and entertainment.
  • Bond Funds: When the U.S. dollar is strong, inflation is usually low, which can be good for bond prices. However rising interest rates often accompany a strong dollar. Therefore investors may want to consider buying the best bond funds for rising interest rates.

Bottom Line on Investing for a Strong Dollar

U.S. goods become more expensive to overseas buyers when the U.S. dollar is strong. But the opposite is also true. The foreign companies can be more profitable when selling their goods to the U.S. in the same strong-dollar environment.

The bottom line is that investors should place their long-term investment needs and objectives ahead of anything that may be happening with short-term economic and market trends. Adding funds for short-term profit is not for everyone and using mutual funds this way should be done sparingly and with relatively small amounts of a portfolio, such as a 5% to 10% allocation.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.