Best Mutual Funds for a Strong US Dollar

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

strong dollar
How to invest when the U.S. dollar is strong. Getty Images

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 in value more than 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 the U.S. exporter will make less of a profit.

Bottom line: 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.

Best Types of Funds When the U.S. Dollar is Strong

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: Again, the largest of foreign companies tend to be exporters and they can perform well in a strong-dollar environment.
  • U.S. Mid-cap Stock Funds: Smaller corporations are not typical exporters. Therefore an investor can use mid-cap stock funds in a similar way within their portfolio as an alternative to domestic large-cap stock funds.
  • 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. But investors should also consider buying the best bond funds for rising interest rates.

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.