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How to profit from and protect against a falling US dollar ?

Companies / Analysis & Strategy Dec 05, 2006 - 10:14 PM GMT

By: Nadeem_Walayat

Companies

The declining dollar is expected to bring earnings boosts to many US multinationals with large over seas exposure / export earnings as a % of total revenues. The declining dollar results in an increase in profit margins and competitiveness against the host countries products & services. Manufacturers such as Intel, Coca Cola and IBM. Producers such as Exxon Mobil and Service companies such as Macdonald's all receive more than 50% of their revenues from overseas interests.


Other sectors of the US economy to benefit is tourism, and related travel companies such as the airlines, hotels. Though a sustained drop would feed through in higher inflation as the price of imported goods and raw materials rises, which will require the Fed to raise interest rates despite the weak economy. Companies to avoid would be retailers such as Wall Mart and exporters to the USA, such as foreign auto manufacturers

For US investors, investing in overseas assets would boost their return in dollar terms i.e. that includes strong overseas companies that are not reliant on exports to the US, overseas bonds., and commodities such as gold (the best route is usually through an gold miner rather than the actual metal).The effect of this coupled with foreigners less likely to hold depreciating dollar assets such as US Treasury bonds, is likely to exaggerate the decline in the dollar and increase gains for holders of overseas assets in dollar terms. As the outflows of funds from the US dollar go into overseas assets.

In Europe, Japan, China and elsewhere the opposite is true, where companies that will benefit from a declining dollar are those with little interest in the US, such as domestic utilities. As investors switch into these in anticipation of holding up during any economic slowdown as a consequence of a further significant decline in the dollar. Interest rates are also likely to fall in these markets as import prices and inflation falls in local terms, even though raw materials priced in dollars will rise, in local currency terms this will overall result in a real terms decline in the local currency due to slowing economic activity, so inversely to the US BOnd Market, the local bond markets will likely rise in anticipation of lower domestic interest rates.

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