3 Stocks to Watch as the Dollar Declines to a 7-Month Low

Key Points

• As the dollar index drops to a seven-month low, a certain group of stocks starts to look more interesting to investors. 
• These businesses and one ETF act as hedges for investors who are mostly allocated to the U.S. market and backed by tailwinds. 
• Wall Street analysts think there is a double-digit upside ahead, and the income aspect could also attract much more capital.

Most stock investors suffer from tunnel vision, as most of their capital is tied up with individual stocks or index funds, and they believe that any risk or reward will be driven by price changes within them. However, stocks are only one cog in the financial market machine that moves through assets like currencies and bonds, not just stock indexes. Often at the center are interest rates set by central banks and the U.S. Federal Reserve (the Fed).

Now that the CME’s FedWatch tool points to the likelihood of interest rate cuts to be here by September 2024, the dollar has been on a downward path in expectation of these cuts, as currencies are significantly driven by interest rate levels. Knowing that the dollar is starting to move and probably not done, investors might want to start looking at a certain group of stocks, some of which have significant international exposure.

This list includes basic materials and metals miner Vale NYSE: VALE and aircraft manufacturing stocks like Boeing Co. NYSE: B.A.. For those who don’t feel too comfortable with investing in individual stocks, an exchange-traded fund (ETF) might be considered here. The iShares MSCI Emerging Markets ETF NYSEARCA: EEM delivers a more diversified approach to playing the potential upside stemming from the weaker dollar.

EEM ETF Offers Investors Growth from a Weaker Dollar with Less Risk

Whenever the dollar lowers, other currencies that trade freely against it tend to benefit. Surprisingly, those pegged to the dollar (like the Yuan and Hong Kong dollar) tend to do best during these rotations. The iShares MSCI Emerging Markets (EEM) ETF seems perfectly positioned, knowing that a lower dollar could be ahead.

Top holdings include Taiwan Semiconductor Manufacturing Co. NYSE: TSM, which not only gives investors emerging market exposure but also allows them to tap into the growth in the technology sector. Tencent Holdings OTCMKTS: TCEHY comes in second place as one of China’s largest media and technology firms, which is considered to be a blue chip today.

Other holdings include banks and construction companies, which are surprisingly focused on Asia. If the dollar were to take a different path, the EEM ETF might have more holdings across Latin America or the Middle East. Still, today’s trend favors Asian currencies and economies the most, as the current holdings suggest.

The ETF now trades at 97.2% of its 52-week high, showing how much momentum and market interest it has called for during the declines in the dollar index. This trend could be continued, if not amplified, once the Fed decides on interest rate cuts.

Beyond the Drama: Boeing Is Safe During a Falling Dollar

When investors look past the recent incidents and corporate drama revolving around Boeing stock currently, the company poses an excellent opportunity to diversify away from today’s falling dollar. Here is how stronger foreign currencies will affect Boeing’s demand cycle.

While a strong dollar encourages domestic airline stocks to make more Boeing orders, a weaker one gives Boeing access to the untapped potential of emerging markets and overseas travel demand. When the dollar falls, making foreign currencies stronger, people tend to travel more to stretch their currencies further, and Boeing has nearly no competition.

The only other player worthy of attention in this industry is Airbus OTCMKTS: EADSY. Boeing now reports up to 60% potential order growth coming from China alone, as the country’s strengthening currency is projected to grow air travel by as much as 5.2% annually, creating the world’s largest traffic market.

This could be why Wall Street analysts feel comfortable forecasting an earnings per share (EPS) swing from negative $2.38 to a net profit of $4.16 in the next 12 months. This significant swing has led those at the UBS group to place a price target of $240 a share for Boeing stock.

To prove these valuations right, Boeing would need to rally by as much as 40% from where it trades today, an upside sponsored by lower dollar values.

Vale Stock Directly Fuels Asia's Economic Buildup

It seems that all of these trends favor Asia’s economic buildup, from the ETF to Boeing’s optimistic order outlooks in China. However, there is one more aspect that could benefit this basic materials stock as a result of a lower dollar coming up.

As a producer and exporter of iron ore in Brazil, Vale is one of the leading suppliers for Asian economies looking to build their infrastructure further. Those like China, Indonesia, Thailand, and even India need lots of iron ore to produce construction steel, and that’s where Vale comes into play.

As the dollar falls, the Brazilian currency is set to strengthen, creating a tailwind in the exchange rate alone that will allow this stock to go higher. Those at J.P. Morgan Chase & Co. think the stock should be worth closer to $20 a share or close to 100% upside from where it trades today.

More than that, the stock offers shareholders a payout of $1.16 a share, translating into an annual dividend yield of 10.9% to outpace inflation and any GPD growth projections. As long as the Fed lowers interest rates, pushing Asia and other emerging markets to build up, Vale could be one stock to consider.