With the U.S. dollar strengthening and the Federal Reserve looking at tightening its monetary policy, the various U.S. market sectors and related exchange traded funds could behave differently in a strong USD environment.
The Trade Weighted U.S. Dollar Index has increased 15% over the past year and is at its highest level in over 10 years, writes Karen Wallace for Morningstar.
Consequently, investors should be aware that the stronger dollar could affect company sales abroad, especially for large multinational companies with significant overseas exposure.
“It’s generally a headwind for U.S. companies that rely on exports to other countries because the currency-translation effects mean that products made and sold in the U.S. (and priced in U.S. dollars) are more expensive to a foreign buyer,” Wallace said. “During periods of relative strength for the greenback, export growth tends to slow.”
The percentage of foreign sales among the S&P 500 companies was about 50% in 2014. Information technology and energy companies are among those with the largest overseas sales exposure.
Consequently, if the USD continues to strengthen against the basket of foreign currencies, ETFs with exposure to the technology sector, including he Technology Select Sector SPDR (NYSEArca: XLK), iShares U.S. Technology ETF (NYSEArca: IYW) and Vanguard Information Technology ETF (NYSEArca: VGT), could falter.
Additionally, investors may want to watch out for energy sector plays, like the Energy Select Sector SPDR (NYSEArca: XLE), Vanguard Energy ETF (NYSEArca: VDE) and iShares U.S. Energy ETF (NYSEArca: IYE).