Currency Exchange Portfolio Effect
Strong dollar. Weak dollar. How does that affect your international investing? Dollar strengthening means it takes less of the dollar to buy the same amount of foreign currency.
Simple, round number example of currency conversion using the yen:
- the dollar buys 100 yen
- you convert 1 dollar to 100 yen
- the dollar strengthens, the dollar buys 120 yen
- you convert your 100 yen but you only get $0.83 in return
- conclusion: when the dollar is strengthening, you lose money on currency conversions
If you buy stock in foreign markets and the dollar strengthens, your stocks are swimming against the tide.
Currently the US is running a huge trade deficit, esp. with Japan and China. If you believe, like I do, that the dollar must fall relative to them, then you won't want to invest as much in the US and you will want to invest more in those countries.