The dollar is up. The dollar is down. What does it mean?Paul RycroftYou hear it regularly in the news:“The dollar rose today against other major currencies,” or “The dollar lost ground today on foreign exchange markets.” Just like stocks and bonds, currencies can fluctuate in value in comparison to each other on a daily basis. For example, at the start of 2011, it would have cost approximately $1.34 to purchase one euro (the European common currency). By the end of April, the U.S. dollar lost value, and $1.48 was required to buy a single euro. Why should you care? Because currency fluctuations affect anyone who buys goods made in other countries, travels abroad or invests globally. In other words, almost all of us are impacted on some level. The impact of fluctuating currency values In terms of the larger economy, U.S. companies seeking to sell products overseas will benefit when the dollar is weaker because this makes it cheaper for other countries to purchase American-made goods. In general, multi-national companies that sell American goods around the world will generate more profits from sales during periods of a weak dollar. As an investor in overseas stocks, you also may benefit when the dollar is declining in value. Suppose you invest $1,000 in a European company at a time when the exchange rate is $1.25 U.S.per euro. Your investment would be worth 800 euros. If after one year, the investment appreciates by five percent, it will be worth 840 euros. But if at the same time, the U.S. dollar had weakened to $1.35 per euro, your investment would be equivalent to $1,134, representing a much more sizable gain of 11 percent. The bulk of the return, in this case, comesfrom the euro gainingstrength. By contrast, if the dollar gained ground during that period, your investment, when sold, would be worth less after being converted back into U.S. currency. An unpredictable market But movements in currency values can also be affected by the actions of speculators who may try to take actions that affect the short-term direction of the exchange rate. Overall, it is important to understand that the changing value of the dollar is a factor to considerwhen investing in global companies or purchasing foreign products, though the risk associated may not be largely influential. ### Paul F Rycroft, CRPC®, CPA Advisor is a financial advisor with Ameriprise Financial Services in Alice, 604 E. Second St.668-1212 or email at paul.f.rycroft@ampf.com and is licensed/registered to do business with U.S. residents only in the states of Texas, Oklahoma and New Mexico. Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients. © 2011 Ameriprise Financial, Inc. All rights reserved. | |
Alice TX Chamber News - January 2012 Alice Business Today |