The US dollar has been strengthening for a number of weeks now, following rising US interest rates, positive economic data and president Donald Trump's tax overhauls at the end of last year. 
Of course, a surge in the world's largest economy's currency will have an impact on markets globally.
Emerging markets, for instance, tend to have a lot of dollar-denominated debt on their balance sheets. And of course, when the currency strengthens, it makes paying back this debt a whole lot more expensive. This has contributed to the MSCI Emerging Markets index's loss of 1.48 per cent over the last six months, while the MSCI World index is up 3.86 per cent.
Performance of indices over 6months
Source: FE Analytics
A strengthening dollar isn't bad news for all areas of the market, though. And, if interest rates in the US keep rising and fiscal policy continues, there is every chance that it could remain strong for some time. Below, I discuss three funds which I think could benefit from the US dollar flexing its muscles.
Hermes US SMID Equity
One of the main beneficiaries of a rising dollar is likely to be US domestic-facing stocks, as importing materials to make their products will be cheaper. It also means that, if their products or services are being bought by US consumers, they are in a better position to spend money than overseas consumers with weaker currencies.
As such, Hermes US SMID Equity might present itself as a good option. The £750m fund is headed up by Mark Sherlock, who predominantly invests in small- and medium-sized companies with strong 'moats' (the ability to maintain a competitive advantage) and consistent cash flows. Mark aims to hold around 60 stocks in the portfolio at any one time, although he is able to hold up to 90 if he feels the need to make the most of mispriced opportunities.
We particularly like the strength and depth of the management team, as well as the fact that it is genuinely differentiated from most US equity funds which usually have a large-cap bias.
Hermes US SMID Equity has a clean ongoing charges figure (OCF) of 0.85 per cent.
The City of London Investment Trust
Internationally-facing UK equities could also do well in a dollar-strengthening environment, as a majority of the FTSE 100's earnings come from overseas. For example, 16.4 per cent of the index is in oil & gas stocks* – and oil is priced in dollars – which means funds that have exposure to these blue-chips could do well.
The City of London Investment Trust, which is managed by Job Curtis, is one of the oldest investment trusts in the UK. It invests mostly in global-facing UK large caps, with the likes of Royal Dutch Shell, BP and HSBC accounting for some of its largest individual holdings.
Curtis chooses his stocks based on how capable they are of paying and increasing their dividends over time, which is why the trust has managed to increase its income pay-outs for more than 50 years. The manager will usually hold a highly-diversified portfolio of at least 100 stocks at any one time, and up to 20 per cent of these can be in overseas companies. We think this is a great core fund for those wanting diversified UK equity exposure.
The City of London Investment Trust is 8 per cent geared, yields 4.1 per cent and has an ongoing charge of 0.42 per cent**.
BlackRock Continental European Income
Of course, it isn't just internationally-facing UK stocks which could fare well under a strengthening dollar. BlackRock Continental European Income also has a large-cap bias, but resides in the IA Europe ex UK sector.
It is managed by Andreas Zoellinger, who looks to provide steady, low-risk growth by investing across the economic cycle. He chooses stocks on a bottom-up basis, with a keen focus on inflation protection, dividend growth and dividend sustainability. Some of its largest holdings include the likes of Unilever, Telefonica and Allianz. It has a top-quartile maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 11.12 per cent over five years, as well as a top-quartile annualised volatility.**
BlackRock has one of the best European teams around, and Alice and Andreas have a wealth of experience under their belts to boot. We like that this fund offers above-average income with below-average volatility.
BlackRock Continental European Income has a clean OCF of 0.92 per cent and yields 3.93 per cent.
*Source: FTSE Russell, FTSE 100 factsheet. Correct as of 30 April 2018.
**Source: FE Analytics. Total return in sterling terms. Correct as of 21 May 2018.
Darius McDermott is managing director at Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.