American firms commonly invest in securities overseas Analyz

American firms commonly invest in securities overseas. Analyze the situation in which firms anticipate a currently weak dollar to strengthen in the near term. How would you expect this assessment to change American firms’ level of overseas investment, if at all?

Solution

Weak dollar implies that one unit of dollar can be exchanged for fewer amount of foreign currency. In other words, when dollar is weak one unit of foreign currency can buy more number of dollars. As one unit of foreign currency can buy more number of dollar, value of foreign investment by US firms (in dollar terms) rises as dollar weakens.

Opposite happens when dollar strengthens that is value of foriegn investment (in dollar terms) falls as dollar strengthens.

So, if US firms are anticipating a currenlty weak dollar to strengthen in the near term then they will strat reducing their level of overseas investment because once the dollar started strenghthening then in that case value of their overseas investment will start declining and this can lead to losses.

Therefore, US firms, in order to minimize their losses, will start curtailing their overseas investment.