Buying USD-denominated stocks as a non-American? You may want to reconsider!

The U.S Dollar Index (DXY) is incredibly weak right now: The U.S Dollar has hit a two-year low and analysts have been forecasting further weaknesses throughout 2021 since the latter half of 2020. In December, Both the euro and pound sterling hit two-year highs against the dollar whilst at the same time the Swiss Franc hit a six-year high. It’s clear to see, then, that the dollar is in a precarious position and doesn’t currently represent the sound investment that it once was.

There are many factors contributing to the heat of the US economy right now: these include the progress of the coronavirus vaccine research and administration, the uncertainty surrounding Joe Biden’s election victory and Donald Trump’s reaction to this, and the Federal Reserve’s commitment to maintaining its unprecedented accommodative monetary policy as a response to the current Covid crisis. Whilst the reasons for the weakness of the dollar are clear, the wider impact that this has on the stock market, and on individuals wishing to invest in any USD-denominated stocks, is much further reaching than you might first assume. Many non-American investors are reconsidering their commitments to USD-denominated stocks altogether. 

A Wide-Reaching Impact 

So why are USD-denominated stocks so unappealing? The answer is surprisingly simple: if you are converting your native currency (such as Euros, GBP, or any other currency, usually dependent on where you are based) into USD then this transaction itself is likely to devalue the real-term value of your investment, effectively ensuring that the transaction, and therefore the deal itself, isn’t financially worthwhile. And this doesn’t just affect the stock market: the same rule applies to property investments too. 

Whilst the property you are interested in purchasing (either as an investment, or for your own personal use) may seem to be good value, when you consider the current exchange rate, and of course the expense of international transfers of funds, you may well find that the real-term value of your purchase declines considerably. This same rule of thumb applies to a wide range of other US denominated asset purchases too: effectively, if you’re looking to invest in any large purchase (stocks, property, or otherwise) then the weak U.S dollar index combined with the exchange and transfers fees will leave you with an incredibly unappealing financial deficit. It’s also worth considering that US-dollar denominated accounts may lack tax advantages in certain countries outside of the U.S: U.S levied withholding taxes of up to 30 percent could be applied on any dividends you earn. 

 Of course there are tools to help you minimise the expense of international cross-currency money transfers, as well as make this process more convenient, but that doesn’t mean that the weak DXY isn’t putting undue pressure on the process. So, what can you do? 

Circumventing the Problem

Whilst the weak U.S dollar index may be bad news, the good news is that there are ways to circumnavigate this problem, if you’re still keen to invest in USD-denominated stocks. The most obvious of these is to look at ETFs and stocks which are dually listed: these are stocks that are listed in other currencies and on other markets outside of the United States, as well as on the U.S Stock market. By purchasing stock from buoyant U.S-based corporations but in your native denomination (or another, more stable currency such as the Euro) you can take advantage of investing in the most attractive markets but without the uncertainties of transferring funds from your native currency and into euros. 

A Long-Term Problem

So, we know that the U.S dollar is falling now, and this is likely to put many foreign investors off investing in U.S stock in the short term. But what is the long-term prognosis for the dollar value? Across 2020 the dollar ended the year down by more than 4% and on average, traders predict that the dollar will end 2021 down by an additional 3% from its current levels. Some traders have forecast that the drop throughout 2021 will be even more severe: according to Money Week, Calvin Tse of Citi thinks that the value of the dollar will drop by as much as an additional 20% by the end of 2021. Moves in any direction of such magnitude are extremely rare in the currency markets, and so if this prediction were true, the results would be unprecedented. 

What is interesting is that whilst the dollar value has been severely affected by the many uncertainties of 2020, the impact on the Forex market has been incredibly calm: perhaps because the devastation of the coronavirus pandemic in 2020 has been global, meaning that all markets have been affected fairly equally, and worldwide governments have adopted fairly similar approaches in terms of fiscal support for the people affected. But this trend is unlikely to last forever: as the dollar value falls, it stands to reason that we should see fluctuations and downward spirals in the markets too.  Could it be that, in the future, we will consider the beginning of 2021 as the calm before the storm? This remains to be seen, but it certainly should inspire caution in investors, particularly non-U.S resident investors, who are hoping to make or increase their commitments to the U.S denominated stock markets. 

Before the crisis year of 2020, the interest rates in the United States were running at around 1.75%. This is a far more attractive yield for investors from both the U.S and globally than the zero or negative interest rates that were available at the time in most other developed markets. In 2020 though, everything changed: America joined its peers in the land of near-zero interest rates, as the Fed Funds rate sits at between 0-0.25%.

The Basics of Buying U.S Stock as a Non-American

It is important to note that a non-American can buy U.S stock, if they are prepared to take the risk of transferring their native currency into dollars, but it isn’t always a straight forward process: there are hoops to jump through. There is no citizenship requirement for owning stocks of American companies, but you are often required to consult with an investment firm and utilize the services of a professional. In the unlikely event that you’re new to investing in U.S markets, the key takeaways that you need to know are that:

Of course, being in a position to buy stock doesn’t mean that you should. And that is a decision that each individual investor can make for themselves, but for foreign investors, most experts are certainly advising that you proceed with caution throughout 2021.