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Resurgent dollar slams Americans' foreign stock holdings

August 14, 2008 |  6:00 pm

The once-struggling U.S. dollar suddenly is the strongman of the world’s major currencies. That’s great for Americans’ purchasing power -- but if you’ve noticed, it’s a heavy blow to the foreign stock holdings in your portfolio.

And because U.S. investors have pumped huge sums into foreign-stock mutual funds in recent years, this turnabout in the dollar may be much more painful for people’s nest eggs than previous rallies in the currency. You’ve probably got more at stake.

The dollar had mostly been falling in value since the beginning of 2002, but by spring of this year it was showing signs of bottoming. The DXY index -- which measures the dollar’s value against six other major currencies -- reached its low for the year on April 22 when it closed at 71.33. It didn't decline further despite all of the subsequent bad news about the U.S. economy and financial system.

Foreign15 The dollar then treaded water until late July, when it began to surge. The DXY index, at 76.67 today, has jumped 6.5% just since July 21.

The greenback has been very strong against the euro and the British pound. The euro slumped to $1.483 today, down from $1.592 on July 21 and the lowest since February.

There’s now a mad rush on Wall Street to get bullish on the dollar. Goldman Sachs & Co. joined the crowd today, declaring in a note to clients that "The Dollar Has Bottomed!" (Yes, with the exclamation point.)

As noted in this post last week, the dollar is rallying in part because global investors see prospects worsening for many economies outside the U.S., particularly in Europe. Also, the summer plunge in commodity prices is good for the buck because many investors had shoveled money into commodities in recent years as a hedge against a weak dollar. Now, some investors are selling commodities to move back into U.S. stocks and bonds, underpinning the dollar.

But the dollar’s new muscle comes with a price: If you own foreign assets, they’re being depreciated -- the flip side of what happened to those assets when the dollar was falling.

The accompanying chart shows net gains or losses on nine major world stock indexes since June 30, measured in local currencies and in dollars.

Germany’s DAX index, for example, is up 0.4% since June 30 in euros. But translated into dollars the DAX is down 5.6%. The Australian market is down 4.5% in Aussie dollars but has plunged 13.1% when translated into U.S. dollars.

If you own a foreign stock mutual fund, the dollar’s turnaround explains a lot about why the fund has (most likely) performed so poorly this summer.

That, alone, isn’t a reason to sell a foreign fund. But this is a good time to take a closer look at your overseas holdings, and whether you’re happy with the mix you have between foreign and domestic stocks.