The dollar is 18% stronger

Here's why that shouldn't make investors happy.

The U.S. Dollar Index, which shows how strong the dollar is compared to a group of other currencies, has gone up 18% in the last year.

Tourists will be happy to hear that the dollar is strong. It means that when you travel, your money goes further.
But investors shouldn't be happy that the dollar is getting stronger.
When the dollar gets stronger, money from other countries will be worth less in dollars. Sam Stovall, CFRA Research's chief investment strategist, says that these earnings will be lower. He also says that your investments overseas will lose money if the dollar goes up.
Experts say that a strong dollar could hurt your portfolio. Here's why and what you might be able to do about it.

Why does having a strong dollar hurt your investments?
When the dollar is strong, money from other countries with currencies that are not as strong can only be changed into fewer dollars. Companies can't make as much money because of this.
Your international connections will have a direct effect on your portfolio, which could be bigger than you think. Analysts at the investment firm Evercore say that about 30% of the S&P 500's income comes from outside the United States. The S&P 500 is a way to measure the U.S. stock market as a whole.

Even more so if you own international stocks, which is often suggested as a way to diversify your portfolio. Todd Rosenbluth, head of research at the investment analytics firm VettaFi, says, "The strong dollar hurts U.S. investors who own international stocks because they don't get the benefits of a local market." The dollar has made it a lot harder for international plans to work this year.

As an example, the MSCI EAFE Index, which is a standard for stocks from developed countries other than the United States, has lost more than 20% so far in 2022. If you take out the effects of currency changes, the index has lost about 7.5%. How to adjust your investments to take a strong dollar into account As with any short-term market change, experts say you shouldn't make big changes to your portfolio or your long-term investing plans. But experts say that you can counteract the effects of a stronger dollar by making a few changes to your portfolio.

By investing more of your U.S. stock money in small or medium-sized companies, you can lower your exposure to the multinational companies that are hurt the most by the dollar. Rosenbluth says that you might also want to think about putting more money into parts of the economy that are less likely to make money from overseas. "Sectors like utilities and real estate get most or all of their income from the U.S., while staples and health-care companies tend to be more international." If you own foreign stocks, you can buy funds that track "currency-hedged" versions of international stock indices.

The managers of these funds buy and sell derivatives to take out the effects of currency changes on the returns of the stocks the funds invest in. Rosenbluth says that you can just pay attention to how each company in the fund is doing. When the dollar is strong, these funds tend to do better than those that aren't hedged, and when the dollar is weak, they tend to do worse.

A 2020 study from Morningstar found that the return you get from a hedged product and a non-hedged product tends to be pretty similar over long periods of time. There are a few other differences between hedged and unhedged funds, and Rosenbluth says that the choice of which to hold comes down to personal preference. But don't try to time currency changes to buy one or the other to make short-term money. "You don't know any more than I do about whether the dollar will keep getting stronger over the next 12 months," he says.