Pros, cons of strong dollar

We’re living in a period where the U.S. dollar is rel- atively strong as measured against other currencies. That certainly sounds like it can only be good for America, but in fact, there are both pros and cons to a strong local currency.

Consider, for starters, that many U.S. businesses generate much of their income abroad. Coca-cola, as an example, generated more than half of its operating revenue outside of North America, according to its last annual report, while Mcdonald’s reaped 64% of its revenue outside of the U.S. So these companies are not exchanging burgers and drinks only for U.S. dollars — they’re also taking in baht, euros, francs, kroner, pesos, pounds, ringgits, riyals, rand, rubles, rupees, shekels, won, yen and yuan.

The exchange rate between any two currencies fluctuates over time. When a multinational company wants to convert non-u.s. revenue into U.S. dollars, the value it gets depends on the current exchange rate. If the other currency is weaker than the dollar, the company will receive fewer dollars for it; when the foreign currency is strong, the value converts into more dollars. Thus, a strong dollar hurts the financial performance of U.S. companies with significant operations abroad.

Some companies even cite adverse currency translation effects when they report disappointing results. Other companies protect themselves to some degree from these effects, perhaps locking in exchange rates via contracts. A strong dollar can also hurt exports, as American goods will cost more for buyers with weaker currencies, and that can depress sales.

On the other hand, a strong dollar is great for Americans traveling abroad, as they’ll get more local currency for their money. Imported goods can get cheaper for Americans, too. A strong dollar will also help American companies that buy a lot of products or services (such as raw materials or outsourced labor) abroad, as they can get more bang for their buck.

Investors may want to keep currency effects in mind, as they can have a significant impact on some companies’ results. Including some international revenue in your portfolio can be a good defense against a weak dollar.