US dollar’s strength
The US dollar’s strength compared to currencies that are widely used in international trade is measured by the Trade Weighted Dollar Index.
The data show that the US dollar has been strengthening against other currencies for the past four years. The US Dollar Index rose from 95.54 to 100.73 at the end of 2016.
However, in 2017, the index has fallen in all months except February. It fell 2.7% month-over-month to $99.48 in January, it rose 1.7% to $101.13 in February, it fell 0.9% to $100.22 in March, it fell 1.3% to $98.9 in April, it fell 2.1% to $96.65 in May, and it fell 1.5% to $95.35 in June. Year-to-date, the index has fallen 6.8%.
Impact on US industry
International travelers from China, Japan, the United Kingdom, Mexico, and Canada form a large part of the US hotel industry’s revenue. According to the American Hotel and Lodging Association, the number of international travelers is expected to rise at a 29% compound annual growth rate to 96.4 million visitors through 2020.
According to most strategists, the weakening dollar isn’t sustainable. Once President Donald Trump starts to deliver on his policy promises on tax, trade, and fiscal stimulus, the dollar should strengthen. In fact, according to Goldman Sachs, the dollar is currently undervalued.
A strengthening US dollar means that travel to the United States is becoming more expensive for visitors from these countries. Travel demand could fall as travelers look for alternative destinations. The length of stays could also fall. Both these factors will likely be detrimental to the hotel industry.
You can gain exposure to hotel stocks by investing in the First Trust Consumer Discretionary AlphaDEX ETF (FXD), which invests ~14.8% in the hotel, restaurants, and leisure sector. FXD holds 0.58% in Wyndham Worldwide (WYN), 0.87% in Hyatt Hotels (H), 0.90% in Hilton Worldwide Holdings (HLT), and 1.2% in Marriott International (MAR).
Next, we’ll look at what falling gas prices could mean for the hotel industry.