How A Stronger Dollar Makes Foreign Investment Even More Compelling

What’s driving the recent increase and how to benefit from it.

It's been a tumultuous year. In addition to the events in Ukraine and the looming threat of recession, the U.S. dollar has soared against nearly every other currency. In late August, the dollar reached parity with the euro for the first time in 20 years and continued its slide throughout September.

Additionally, on September 26, the British pound hit its lowest level ever against the U.S. dollar, breaking the previous record low set in 1985. The Japanese yen has slid 23 percent against the dollar from its level just a year ago. Needless to say, the U.S. dollar is exhibiting exceptional strength around the globe.

Predicting the long-term effects of a strong U.S. dollar is nearly impossible. However, as a U.S. investor, there are ways to take advantage of a strong dollar, and one of them is to allocate funds to specific foreign investment opportunities that can create profits despite the challenging situation for the rest of the world.

No Alternative to Dollar Dominance

Despite longstanding concerns over rising debt levels and fiscal deficits, U.S. dollars play an integral role in many global transactions. Nearly 40 percent of international financial transactions are settled in dollars, and almost 90 percent of foreign exchange transactions involve the dollar. 

Further, many commodities—from oil to soybeans—are traded in U.S. currency, forcing importers to use it to buy goods on the open market. Exportation firms also tend to hold funds in U.S. Treasury securities to facilitate future transactions. 

As long as the U.S. Treasury's liquidity underpins the international trade and investing landscape, the dollar will likely remain the dominant currency worldwide. 

The Federal Reserve and international dollar-denominated debt drive demand for dollars

The dollar is often seen as a "safe haven" currency whose index rises in tumultuous times. The current high inflation levels globally, increasing interest rates in the U.S., and widespread worry drive the dollar's appeal. 

To combat inflation, the Federal Reserve's recent interest rate hikes have increased rates in the U.S. above many other large economies, making the dollar more attractive to foreign investors seeking higher returns.

Another factor supporting the strength of the dollar is the prevalence of foreign companies and governments with dollar-denominated debt. For example, countries such as Sri Lanka, Turkey, and Argentina find themselves struggling to meet dollar-denominated debt obligations. 

A country or business not taking in enough dollars through its normal operations will be forced to sell its local currency and purchase dollars on the open market to satisfy its debt obligations. These transactions create selling pressure on an already weakened local currency and buying pressure on an already strong dollar.

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Implications of a strong dollar index

The U.S. dollar index tracks the value of the U.S. dollar relative to six other major world currencies, including the euro, Japanese yen, and the British pound. Although the basket hasn't been updated since 2002, and the currencies in the index no longer reflect the U.S.'s major trading partners, it's a helpful indicator of the health of the U.S. economy and currency.

With a base of 100, set following the collapse of the Bretton Woods agreement, the index rises and falls as the dollar appreciates or declines against the other currencies in the basket. In late September, the index was just shy of 115 as most major currencies in the dollar index basket lost significant value against the dollar.

Strong currencies help curb domestic inflation by decreasing import costs and often they can also jumpstart economic growth. But what's good for the U.S. is a mixed bag for the rest of the world. The strong dollar is painful for emerging economies that rely on U.S. dollar reserves. They also feel the pinch as their debt payments and borrowing costs increase in local currency.

Two Prime Ways U.S. Investors Can Benefit From a Strong Dollar

While a stronger dollar offers mixed outcomes for investors in stock indexes and multinational companies selling outside of the U.S., some investors are poised to benefit. 

By putting their money into foreign companies selling back to the U.S., they get more bang for their buck. Not only does the investment go further, but they might also see higher returns. 

The potential for outsized returns is driven by two core factors: low relative labor costs and increased desire for imported goods.

Each dollar buys more labor

Investments in emerging markets are exceptionally affordable as each dollar buys more local currency. Assuming that local labor costs remain the same, the dollar's strength means each dollar can purchase more labor, making lower labor costs a prime lever for U.S. investors to benefit from a strong dollar. 

Further, U.S. investors can get more labor for their buck by investing in countries like Colombia and the rest of Latin America with weaker currencies.

Although this phenomenon currently applies to a lesser degree with the euro and other established markets, it's especially evident with trading partners in emerging economies where labor rates are often even lower.

Imports become more attractive

Although the dollar's strength can reduce the global desire for American exports, it makes imported products more affordable for average citizens. The effect is expected on big-ticket items like cars and electronics, but it also impacts day-to-day spending on items such as gas and groceries. Since 2016, Americans have imported over half of their fruits from other countries, totaling nearly $19 billion in 2021.

Much of this produce is nearshored from poorer countries with lower labor costs in Latin America. Like labor, stable prices in local currency mean more affordable limes, avocados, and other fruits and veggies for Americans.

A real-life example of these benefits

When the U.S. dollar is strong, American investors have much to gain by investing in foreign assets and companies priced in dollars and selling products in other currencies. 

One example is investing in a Colombian produce farm that sells its products in dollars back to the U.S. market. The stronger dollar buys more Colombian pesos, reducing the value of labor proportional to the total investment. The farm can then sell its products in dollars back to the U.S. (or other global markets) and benefits from higher margins and higher demand.

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Why Colombian Farmland Is a Perfect Investment for a Soaring Dollar

Regardless of what the dollar index shows, investing in emerging markets can be an excellent way for U.S. investors to gain exposure to the economic growth available in the global economy.

An attractive investment environment

Take for example Colombia, which is already an attractive target for investors with U.S. dollars. Not only does it enjoy a status as a stable emerging market country, but it has many other advantages as well.

Colombia, with the fourth largest gross domestic product in South America, offers:

• Numerous tax benefits and free trade agreements with many countries around the world
• Robust legal frameworks protecting companies and private investments
• A stable investment environment with limited capital controls imposed by the Colombian central bank
• A government-backed transition from extractive exports (i.e., fossil fuels) to sustainable agriculture
• The solid historical relationship maintained between the United States and Colombian governments as mutually essential trade partners
• Geostrategic location with access to both the Atlantic and Pacific oceans allows products shipped from Colombian ports to reach the U.S. several days faster than products trucked in from Mexico
• A diversified economy expanding in produce exports, tourism, real estate, and other creative industries

©yorkfoto via Canva.com

U.S. dollar-based farmland owners are poised to gain

Like the U.S. dollar has strengthened over the past year against the Canadian dollar, euro, and Japanese yen, it has also gained against other neighboring and emerging market currencies. For example, since last year, the Colombian peso has lost about 20 percent of its value against the U.S. dollar. Each dollar buys more pesos, and barring excessive inflation, labor now costs fewer dollars.

This means Americans investing their dollars in Colombian farmland are poised to take advantage of better import prices, lower labor costs, and higher profits. Typically favorable labor costs become an even better value due to the strong dollar, and because many Latin American farms sell their products in USD back to the U.S. market, strong demand driven by lower prices can be expected.

Farmland's other benefits

People seek attractive investment vehicles regardless of interest rates or what happens in the global economy. Farmland's scarcity and negative correlation with other assets mean it's not as vulnerable to chaos in exchange rates, an energy crisis, or central banks raising interest rates. It tends to outperform stocks and other asset classes as a recession-proof asset. Farmland often delivers steady returns despite a down economy, and the need for food will continue to increase to keep up with global population growth.

How to Take Advantage of the Strong Dollar

The U.S. dollar has soared against nearly every other currency this year. While this may be troublesome for the rest of the world, it can benefit U.S. investors in foreign operations, especially when choosing companies that sell their products in dollars to the U.S. market.

If you are ready to learn more about diversifying your portfolio and taking advantage of the historically strong dollar with a recession-proof investment like farmland, complete the form below to explore passive income investment opportunities with Farmfolio in successful, established Latin American farms selling to major U.S. retailers today.

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