Will a falling dollar impact my portfolio?

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Markets are influenced by a multitude of factors so we can’t say for sure why the dollar has been falling. But we can identify some possibilities. The current administration’s policies have led some investors to question the stability of America's institutions and its place in the world. Such nervousness has naturally led some to sell US assets. Just as you did with your Nvidia shares, to use the proceeds those investors will need to sell the dollars they receive from such sales and buy other currencies. Such selling of the dollar puts downward pressure on its price. Even foreign central banks have been diversifying their reserves away from American assets such as US government bonds (‘treasuries’) and into alternatives such as gold. 

Wall Street’s strong performance over recent years has led many investors’ portfolios to become dominated by US shares and prompted a desire to rebalance, which also involves selling those stocks and investing the proceeds in other countries, again putting pressure on the dollar when the money is used to buy other currencies.

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Will the dollar keep falling?

No financial market can be reliably predicted but there are some reasons to think the American currency could continue to lose value.

President Trump has said he wants to narrow America's trade deficit – that is, he wants the US to export more and import less. Tariffs are one means to that end but a weaker dollar helps, as it makes exports more competitive and imports more expensive. 

‘The US dollar has become an explicit policy tool, with a clear preference for curbing its strength,’ Salman Ahmed, Fidelity’s global head of macro and strategic asset allocation, said this week. ‘Given valuation levels, we believe the dollar has entered a multi-year downcycle.’

Tom Stevenson, investment director of Fidelity Personal Investing, said: ‘The events of the past few weeks will only accelerate the rotation out of US assets into the rest of the world. I am preparing for an extended period of dollar weakness.’

The dollar has long been a safe haven to which investors flock in times of crisis. It is also a crucial backbone of world trade and international financial markets. But that ‘reserve currency’ status is increasingly being called into question.

‘The gold price is telling us we [America] are losing reserve currency status at an accelerating rate,’ said Mike Novogratz, the billionaire cryptocurrency investor. The metal has been hitting new record highs repeatedly in recent months.

• Read: Where next for gold?

How to protect your portfolio from a weak dollar

The most obvious way to reduce your exposure to the dollar is of course to sell investments denominated in that currency such as US stocks and redeploy the proceeds in other parts of the world and in assets that tend to benefit from a weaker dollar.

Tom Stevenson said he planned to hold ‘less in America and more in investments that typically benefit from a fall in the US currency – commodities and emerging markets’.

He added: ‘I am maxing out the geographic diversification of my portfolio. The events of the past few weeks will only accelerate the rotation out of US assets into the rest of the world. Wherever the money goes, I want to be riding the same wave.’

If on the other hand you want to maintain your exposure to Wall Street but not lose sleep over currency fluctuations, ‘hedging’ offers a solution. Some US funds offer variants that incorporate hedging – in other words, they aim to remove the element of return linked to exchange rates and simply offer the gain or loss achieved by the fund’s holdings in their own currency.

One example is the Fidelity Index US Fund. Hedging does cost money, however, and the hedged version of this fund costs 0.11% of assets annually, compared with 0.06% for the unhedged version. You can find more funds that offer hedged versions (also called ‘share classes’) by visiting our Investment Finder and entering ‘hedged’ into the search box.

Fidelity’s asset allocation strategists also recommended ‘real assets such as gold, infrastructure and commodity-linked equities’ for the current economic and political environment. You can invest in gold via exchange-traded funds such as the iShares Physical Gold exchange-traded commodity and in infrastructure via funds such as International Public Partnerships, an investment trust, and the First Sentier Global Listed Infrastructure Fund, which incidentally offers a hedged share class. All three are on Fidelity’s Select 50 list of recommended funds. For commodity-linked shares you could consider funds such as BlackRock World Mining; a hedged version is also available.

A final point to remember is that our own FTSE 100 index contains many stocks that earn much of their money in dollars, so the index tends to suffer from weakness in the US currency as those dollar earnings buy fewer pounds.

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