For about ten years, investment strategists have been arguing that, since half of the world’s stock is outside the United States, we should invest about that much in foreign stocks. In other words, about 50% of your portfolio should be invested internationally. One way to do this was to buy the stock of large U.S. multinational companies, whose revenue from foreign nations already exceeds 50% of their total revenue. When the dollar was decreasing in value, that made their foreign earnings even more valuable.
Now, that has changed. The recent earnings announcements by Microsoft, Pfizer, Caterpillar, P&G and other large companies all attributed disappointing earnings to the appreciating dollar. (Foreign earnings were no longer able to buy as many dollars now that the dollar is so expensive.) The stock market dropped almost 300 points that day. Just for good measure, it dropped another 200 points today.
It sure looks like we are entering a “currency war,” where each nation wants to cheapen its currency to help its exports and labor force. Because the U.S. economy is relatively strong compared to other currencies, we can take the economic loss from a stronger dollar without complaining too much. After all, we want other economies to be stronger as well.
But, how much is too much? The chart above shows a near vertical ascent of the dollar since last June. So, when is fast too fast? This chart shows you the answer.