U.S. Dollar is Weakening: Here're the Best Ways to Play It

The U.S. dollar continues to hover be near a two-year low, with currency strategists apprehending more declines ahead. The U.S. dollar index has slipped nearly 7% in the last three-month period. In fact, the index that measures the greenback against six other major currencies is down nearly 9% from its March highs and is on track for its worst month since 2011. Notably, currency strategists at Goldman Sachs now predict a 5% weaker dollar compared to other major currencies in the world next year.


But why is the U.S. dollar weakening? Primarily, the dollar has been more or less 20% overvalued before May, which eventually led to the slide in the past three months. What’s more, gains in other currencies, especially the euro, as Europe’s economic recovery from the coronavirus pandemic outpaced that of the United States, resulted in a weaker dollar. And why not? The United States has certainly struggled to contain the spike in coronavirus cases, dashing hopes of a V-shaped economic recovery. U.S. consumer confidence took a beating this month, losing steam following two months of recovery. New cases of COVID-19 infections, no doubt, dampened consumer consumption. Four U.S. states on Jul 28 reported a one-day record of COVID-19 deaths while nationwide cases continue to surge.


Also, uncertainties related to the additional fiscal stimulus package to pep up the economy are weighing on the dollar. Some of the Republicans in the U.S. Senate were against its own party’s $1-trillion coronavirus relief proposal, while Democrats continue to ask for an extension of a $600-per-week coronavirus jobless benefit.


What does a weaker dollar mean for investors? Obviously, a weak dollar led to a rush to gold, which last stood at $1,963.5 per ounce on Jul 28, almost close to its record high of $1,980.5 per ounce. This is because when the value of dollar decreases relative to other currencies throughout the globe, the price of gold tends to rise in dollar terms.


And with gold prices near an all-time high, it seems prudent for investors to pick gold mining stocks. One of the prominent names is Kinross Gold Corporation KGC, which engages in the acquisition, exploration and development of gold properties in the United States along with several other countries.


Kinross Gold currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has moved up 14.5% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 125% and 85.3%, respectively. Shares of Kinross Gold have surged 85.2% so far this year compared with the Mining - Gold industry’s rise of 53.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


By the way, a weaker dollar is also good for the broader stock market. Per Goldman’s David Kostin, a 10% fall in the value of dollar collectively increases S&P 500 company’s earnings per share by almost 3%. And when it comes to share price movement, since 1980, the S&P 500 has gained an average 2.6% in months when the dollar declined versus 0.7% gain in months when dollar increased sharply.


But most importantly, the biggest gainers would be companies that derive a majority of their earnings from overseas. After all, such companies are exposed to foreign exchange risks between the United States and other countries they are operating in. Thus, if dollar gains strength, it tends to hamper foreign sales of such companies.


According to Goldman Sachs, companies that generate a majority of sales from abroad include information technology players like Lam Research Corporation LRCX and NVIDIA Corporation NVDA; energy bigwig Baker Hughes Company BKR; and discretionary stocks such as BorgWarner Inc. BWA. Thus, keeping an eye on such stocks undoubtedly seems judicious at the moment.


The Zacks Consensus Estimate for Lam Research’s current-year earnings has moved up 0.1% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 32.4% and 5.8%, respectively.


Similarly, the Zacks Consensus Estimate for NVIDIA’s current-year earnings has risen 1.2% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 55.7% and 36.4%, respectively (read more: 4 Cloud Stocks to Win Big on Microsoft's Stellar Earnings Show).


Baker Hughes’ consensus estimate for current-year earnings has also risen 10% over the past 60 days. The company’s expected earnings growth rate for the next year is a whopping 109.1%.


Meanwhile, the Zacks Consensus Estimate for BorgWarner’s current-year earnings has moved 5.5% north over the past 60 days. The company’s expected earnings growth rate for the next year is a solid 67%.


Lam Research, NVIDIA, Baker Hughes and BorgWarner currently possess a Zacks Rank #3 (Hold).


Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained an impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.


This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.


See their latest picks free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
BorgWarner Inc. (BWA) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Lam Research Corporation (LRCX) : Free Stock Analysis Report
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
Baker Hughes Company (BKR) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research