Before we jump into which investments win and which lose when the dollar strengthens, what does it even mean for a currency to get strong or weak?strong-dollar

This concept of strength or weakness refers to the relative value of the U.S. dollar to other currencies. When the dollar is strong, it means you can exchange one U.S. dollar and receive more of a foreign currency. When the dollar is weak, it buys less of a given currency.

The strength of the dollar – and other currencies – depends on many factors, including inflation, monetary policy, economic conditions and political developments.

Inflation is the primary factor. As inflation increases, so do interest rates. As interest rates increase, foreign investors want to invest more money into that country to capture the higher rate of return, thus increasing demand for the currency.

Recently, the U.S. dollar has been showing a lot of strength for exactly this reason – there is increasing expectation that interest rates are going to rise.

There’s a big downside to a strong dollar, however. It means that U.S. companies that have a large presence in other countries will experience the opposite effect of doing business here in the U.S. Since that foreign currency is worth less when converted back to U.S. dollars, it can significantly impact the top and bottom lines of financial results.

If you’ve been reading quarterly earnings reports, especially this year, you’ve seen a lot of companies discuss “currency headwinds,” which is exactly what I’m talking about.

So what investments allow you to take advantage of a strong dollar?

The first thing is to look for companies that have a strong U.S. presence, and avoid multinational corporations. A lot of small-cap stocks fall into this category, since they haven’t expanded internationally yet.

Consider ETFs that focus on domestic small caps, like Vanguard Small-Cap ETF (NYSE: VB) or Charles Schwab U.S. SmallCap ETF (NYSE: SCHA). For individual stocks, think about companies like Southwest Airlines (NYSE: LUV), and  Dollar Tree Stores (NYSE: DLTR).

Domestic REITs are a great choice. For hotels with only U.S. holdings, buy Ashford Hospitality Trust (NYSE: AHT). Realty Income (NYSE: O) is the famous monthly dividend payer for its shopping center portfolio. Essex Property Trust (NYSE: ESS) is the big apartment player.

Retailers like Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) are also good. So are utilities like Duke Energy (NYSE: DUK).

Business development companies (BDCs) make loans to fast-growing companies in the U.S. only. You can buy a basket of these with the UBS ETRACS Wells Fargo Business Development Company ETN (NYSE: BDCS), which pays an 8% yield.

You can also consider a basket of preferred stocks, in which the underlying companies may have some international exposure, but will have virtually no impact on the preferred issuances. You may want to look at the iShares U.S. Preferred Stock ETF (NYSE: PFF), which holds a big basket of these stocks and pays a 6.18% dividend.

Just remember, these suggestions are based solely on the strong dollar issue, and not on other considerations or factors that may negate that issue.

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Published by Wyatt Investment Research at