The U.S. dollar has strengthened considerably this year, up nearly 6%. This is unknown territory for many investors since the dollar was weak for much of the 2000s. There are several implications.
Over the long-run, dollar strength is welcome since it is a sign of strength for the U.S. economy the result of foreign investment in the U.S.
Over the short-run, the implications are mixed. A stronger dollar could crimp U.S. exports and corporate profits. S&P 500 companies derive nearly half of their earnings overseas.
A stronger dollar could reduce the return on foreign investments as overseas currencies depreciate. Hedging a portion of ones overseas currency exposure can be beneficial in this regard. Over the long-run, however, currency movements tend to be a wash.
At the same time, a stronger dollar could boost foreign markets as their exports to the U.S. become more competitive.
Unhedged foreign bond funds, in particular, could struggle should the dollar strengthen.