Beware of a Strong Dollar

Strong is good.

Strong earnings. Strong sales. Strong demand. Strong orders. These all paint a picture of economic growth, which is good for the country.

But when it comes to the U.S. dollar in a global market... strong is a problem.

The U.S. dollar has been on a tear recently, soaring higher against the other major currencies so that the U.S. Dollar Index is now up 4.3% in 2016. While that doesn't sound like much when you look at the Dow Jones Industrial Average, which has enjoyed a double-digit gain this year, you have to remember that currencies don't make huge moves. At least, they normally shouldn't.

Now the dollar is nearing parity with the euro, which has its own basket of troubles as the union threatens to pull apart at the seams. Currency analysts at Deutsche Bank are actually calling for the euro to trade below parity with the dollar in 2017, falling to $0.95.

But a strong dollar means that U.S. goods sold overseas are now more expensive, making them less competitive with local goods. Companies are either faced with slashing their prices overseas to stay competitive - which results in less revenue - or keeping their prices unchanged and risking fewer sales. Either way, the picture isn't good.

Multinational corporations are going to see their earnings squeezed even further in the coming quarters as their foreign sales take a hefty hit.

And the dollar's strength is unlikely to wane anytime soon. The Fed's interest-rate hike just made the dollar more attractive, increasing demand. The Fed has said that it's looking to raise rates three times in 2017 - not that I'm actually looking for that to happen. Remember that the Fed stated at the start of this year that we'd see four rate hikes.

The latest economic reports showed some nice strength, but if the U.S. dollar continues its climb against the other currencies of the world, we could see our multinational companies flounder... triggering an economic collapse.

The Fed may be choosing to ignore the data right in front of it, but you can't. The center cannot hold. This economy will soon fall apart. But you don't have to let your wealth get crushed under the rubble. That doesn't mean you need to stuff all your cash under your mattress for safekeeping. You can take steps now to not only protect your wealth from the coming collapse, but even position yourself to profit as well.

As the Senior Managing Editor for The Sovereign Investor Daily, Jocelynn handles the day-to-day operations for bringing you the Sovereign team's daily insight. She has spent over a decade working as an editor for financial publications. A former trader, Jocelynn has spent 15 years in the financial industry.
By Jocelynn Smith