The U.S. financial system is doomed.
At least that’s what the media and the myriad of financial “experts” on social media sites like TikTok and YouTube are saying.
Recently, we’ve seen headlines about the BRICS countries (Brazil, Russian, India, China, and South Africa) creating a gold/rare earth metals-backed currency of their own… All, supposedly, in an effort to subvert the U.S. dollar (USD) as the world’s reserve currency.
Media personalities are now questioning the strength of the dollar… suggesting the end of the dollar’s dominance… or even saying that the end of the dollar is near.
Seeing all these headlines, it’s easy to be scared.
But remember, when we allow fear or greed to inspire our investing decisions, we’re more likely to make mistakes.
At Intelligent Income Daily, we tune out the noise and focus on fundamental data when making portfolio management decisions. Objective data analysis allows us to generate safe and reliable passive income. And that gives us the reassurance we need to sleep well at night.
Looking at the data, after nearly 80 years as the world’s reserve currency, I don’t believe this fear mongering about the USD is something investors should lose sleep over.
But even if they’re right, our strategy means there’s still no reason to panic.
Today, I’ll show you why the dollar isn’t doomed. And even if it does see weakness, that represents an opportunity to earn even more income for intelligent investors.
How the USD Became the World’s Reserve Currency
The USD became the world’s reserve currency in 1944 after the Bretton Woods Agreement.
This agreement occurred because the United States had accumulated the majority of the world’s gold reserves during World War II – that’s what its allies used to pay for the weapons and other goods that it supplied them before entering into the war in December of 1941.
Diminished gold reserves across the world meant that returning to the gold standard would be impossible for most countries.
At the time, the closest thing to gold was the USD. So that’s what others decided to peg their currencies against.
Since 1944 there have been major changes made (namely, the fact that the USD is no longer backed by gold as of 1971). However, throughout the decades the USD has remained relatively stable and continues to serve as the world’s reserve currency today.
But in recent years we’ve seen the percentage of USD reserves fall across the world.
In 2000, 71.2% of global currency reserves were USD.
By 2020, that figure had fallen to 59.0%.
Yet, despite this trend, I don’t foresee a pivot away from the USD anytime soon.
In fact, in recent years the dollar’s strength has risen.
A Strong Dollar Hurts International Sales Growth
This is one of the reasons why America’s adversaries are hoping to create an alternative reserve currency.
But the good news is: if they succeed in weakening the dollar (however unlikely that may be) on the global stage, it’ll be a boon for U.S. companies doing business in foreign countries.
For decades, U.S. companies have pursued growth in international markets.
For instance, no matter where you go in the world, you’ll see people drinking Coca-Cola as well as using Microsoft products.
Today, there are multinational U.S. stocks (domestic companies that do business across the world) that generate the majority of their sales in overseas markets.
And since there are approximately 334 million people living in the U.S. and roughly 8 billion people living on planet Earth, the international customer opportunity is significantly larger than the domestic one.
However, there is one small problem… the foreign exchange rate.
This is why the phrase “currency headwind” has been so popular in earnings reports over the last year or so.
As great as it is for U.S. companies to have a large market share across the world, their earnings results are in U.S. dollars.
And although it might seem counterintuitive, when the USD is strong, that means that currency sales and earnings growth from these multinational stocks are weak.
Here are just two examples…
During 2022, the U.S. dollar’s strong exchange rate relative to the Euro was up by nearly 6%.
This impacted Coca-Cola, the largest non-alcoholic beverage company in the world, selling products in over 200 countries.
During the company’s recent fourth quarter earnings report, the word “currency” came up 104 times.
In 2022, Coca-Cola’s full-year earnings-per-share saw a double-digit currency headwind (meaning that earnings-per-share would have been 10% higher if the USD wasn’t so strong last year).
To put this in perspective, Coca-Cola sells 1.9 billion drinks per day according to their website.
So if Coca-Cola sold a can of Coke for say $1.00 in Europe in December of 2022, that sale would be worth $0.06 less by the end of the year.
$0.06 might not seem like much but multiply that by say 1 billion purchases of Coca-Cola drinks over the course of one month in Europe, and you are looking at a $60 million decrease in profits. It adds up quickly.
Microsoft, one of the largest companies in the world, faced similar problems in 2022.
During its most recent quarter, Microsoft generated $52.75 billion in revenue.
That represented 2% year-over-year growth.
However, currency headwinds added up to $2.65 billion during the quarter. Without these headwinds, Microsoft’s sales growth would have been 7%.
And things were even worse on the bottom-line.
Microsoft’s net income was down by 8% last quarter, and all this weakness was due to foreign exchange issues.
In other words, currency issues cost Microsoft $1.9 billion in profits last quarter alone.
The Upside to Your Portfolio
So, the next time that you see a scary headline, or hear discussion about the dollar’s demise at a cocktail party this year, don’t give in to panic. A weaker dollar is going to result in stronger profits for many of the dividend growth companies that you likely own.
It may hit your pocket book a little harder when you book an overseas vacation for you and your family, but it won’t destroy the overall U.S. financial system.
Instead, companies with the highest percentage of international sales will be poised to benefit most from this trend.
So if you’re worried about competing currencies, this metric should be high on your priority list when examining the overall preparedness of your portfolio.
There are dozens of well-known, blue-chip dividend growth stocks that have been hurt by the strong dollar in recent years.
And moving forward, these are the names that offer substantial upside in the event that the USD continues to weaken.
We take all of this into account in our Intelligent Income Investor service. If you haven’t checked it out yet, now is the time.
At Wide Moat Research, we take a granular approach to analyzing all of our investments’ fundamentals. We screen each and every recommendation for its ability to create trustworthy profit margins over time and in lieu of all market conditions.
Our selection process is unparalleled in terms of the in-depth research we do. And we always set up our trades to get a discounted price. To learn more about our Intelligent Income Investor service and receive a free pick, click here.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily