Inflation Problems Posed By The Dollar's Decline

On Tuesday, the U.S. dollar fell to its lowest point since February, which marks another challenge for the U.S. economy's inability to control rising prices.

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It is no secret that in the past, there have always been winners and losers when the dollar was stronger or weaker than other currencies. In recent years, multinational American companies have been complaining about the strength of the dollar, which has made their goods more expensive in foreign markets and reduced their profits once they convert their products into the U.S. dollar.

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In spite of the fact that there have been improvements over the past few months, the U.S. Dollar Index (DXY) has fallen by nearly 4% over the past month despite still enjoying an annual gain of more than 2%.

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The consequences of this are that foreign imports to the U.S. have gotten more costly. In one sense, this can be seen as a return to normalcy, rather than a downward spiral.

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Many of these issues have now abated, but there were previously issues associated with manufacturing and shipping that bolstered inflation from the supply side. These issues were particularly prevalent during the Covid-19 pandemic. After a period of hefty monetary stimulus, Brogan Group Equity Research noted Tuesday that the supply-driven causes of inflation had reemerged, namely the surplus of dollars after the shortage of goods.

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The firm stated in its report that, in addition to the traditional causes of inflation that still exist today, the excessive printing of money by central bankers during the pandemic remains alive. Until we see a change in the U.S. Dollar, we will continue to see an increase in inflation-sensitive assets, especially inflationary stocks, and commodities, as long as there is a bearish condition in place for the U.S. Dollar.

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Taking into account that oil prices are currently climbing, though temporarily, this is already causing the cost of energy to soar for many Americans, and it is something that the Federal Reserve won't be able to do much about.

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For example, if oil prices stay stubbornly high for Americans, the central bank would likely have to keep increasing interest rates, which would be its only means of fighting inflation. That wouldn't be what most investors would want to hear, of course.

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In spite of this, there are some opportunities for investors who would benefit from continued dollar weakness: They would be able to buy shares of multinational corporations whose shipments come largely from abroad, by which they gain from a weaker dollar.

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More than half of Google parent Alphabet's revenue comes from overseas, according to Bespoke Investment Group AAPL -0.91% (AAPL), Microsoft MSFT -0.73% (MSFT), and Apple AAPL -0.91% (AAPL).

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These three names are also the centerpieces of a new defensive cohort of big tech stocks that have done well during the recent turmoil in the banking sector. It is possible that they could continue to do well if the dollar acts as a driver of inflation in the headlines - and as one of the Fed's primary concerns - going forward.

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