Portfolio Investments for a Weakening Dollar

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While an EverBank account is fully insured by the Federal Deposit Insurance Corp. (FDIC), that insurance covers only the failure of the bank, not currency risk. That means depositors need to be certain that they know what risks a certain foreign central bank is facing before they lock their money away for three months, says Chuck Butler, president of EverBank World Markets. On the other hand, depositors holding money in an Australian dollar sub-account benefited this week from the Australian central bank's surprise quarter-percentage-point rate hike.

EverBank currently holds over $1 billion in multicurrency accounts and Butler expects to see additional cash inflows if any currency starts to gain momentum against the dollar. He doesn't expect central bank intervention to thwart such momentum because it normally works only in the short term. "The markets usually have deeper pockets than any central bank," he says. "There were rumors that the European Central Bank would intervene" when the euro soared against the greenback in April 2008, says Butler, "but it got to $1.60 and we never saw any intervention."

higher yuan could boost U.S. exports

More aggressive investors who seek higher returns than cash provides might want to buy the government and corporate debt of countries whose balance sheets are more robust than the U.S., such as some in Asia, says Knepp at Genworth. His company owns shares of the Aberdeen Asia Bond Institutional Single Fund (CSABX), which Aberdeen Asset Management bought from Credit Suisse earlier this year. Knepp expects the fund to generate a 10% to 13% return over the next 12 months—"unless we see a big depreciation in the dollar," in which case the return would be much higher.

The portfolio is comprised almost entirely of investment-grade debt, with roughly 37% in sovereign debt, 45% in corporate bonds, and the rest in Asian currencies as of the end of June. The fund's largest holdings are in Korean and Singapore government bonds.

A further decline in the dollar would help U.S. manufacturers by pricing exports down and making them more competitive, says Scott Paul, executive director of the Alliance for American Manufacturing in Washington. But more than 80% of the U.S.'s global nonpetroleum trade deficit is with China, so "unless the dollar drops in value against the Chinese yuan, the benefits of a weakened dollar for manufacturing are going to be limited," he says.

Because of statutory requirements, the Obama Administration is expected to decide within the next week if it wants to formally label China a currency manipulator. That would increase the pressure on China from the international trade system to decouple the yuan from its dollar peg, he says. Critics maintain that the dollar peg keeps the yuan's value artificially low vs. the dollar.

U.S. multinationals: unique strengths

To the extent that a weaker dollar would boost manufacturing exports from the U.S., it would be expected to increase earnings for U.S. companies with a major presence in foreign markets. Big U.S. companies with significant overseas revenues include stalwarts such as Colgate-Palmolive (CL), General Electric (GE), and Caterpillar (CAT). A weaker dollar also means that the revenues U.S. companies generate overseas in local currencies would translate into more dollars when repatriated.

Genworth's equity-based strategy favors U.S. multinational companies not only because they benefit from higher revenues in terms of dollars, but because they gain by selling into faster-growing regions than the U.S., says Knepp. He expects the earnings growth for these companies to outpace those of the typical domestically focused U.S. companies. The fact that these multinationals tend to have fairly strong franchises that sell relatively indispensable products, such as consumer staples and energy and technology equipment, means that their returns on a sector basis should be better than the broader market, he adds.

U.S. stocks as a whole might even have a decent chance of overcoming significant further depreciation in the greenback. If the equities market—which remains 30% below its 2007 peak level—were to continue to rally in line with expected earnings improvement, "it wouldn't be too difficult for that [to counteract] a 5% to 6% [further decline] on the dollar," says Cline at the Peterson Institute.

Whatever the dollar's fate is, investment strategists are likely to keep a close watch on it as they adjust the asset allocation in their portfolios during the months ahead.

Bogoslaw is a reporter for BusinessWeek's Investing channel.

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