The dollar is on its longest winning streak in more than 17 years and is now trading at a four-year peak against other currencies, but don’t rejoice. This is not a good time for the dollar to be strengthening.

And the strong dollar could lead to price deflation, which could also harm the recovery.

While a strengthening dollar was not a big issue when U.S. exports were a small part of corporate earnings, now more than 40% of profits for Standard & Poor’s 500 firms come from overseas. And these profits from higher-growth emerging markets have offset lower growth in the U.S. and other developed economies.

Of course, some analysts believe that the dollar strengthening isn’t so bad. They think it’s just a reflection of investors looking forward the Fed raising interest rates as the U.S. economy improves.

But that assumes our recovery is on solid ground. The U.S. economy expanded at an annual rate of 4.6% in the second quarter, according to the Commerce Department. But this is following a first quarter where GDP contracted by 2.9%. So declaring that the U.S. economy has turned the corner is premature. The housing market still struggles, consumer spending is still weak and jobs being created are lower paying.

The U.S. economy is still projected to deliver a tepid 2% growth for the year, according to Federal Reserve projections. I’d like to see a few quarters of consistent growth before concluding the U.S. recovery is here to stay. And the U.S. economy would have to deliver better than 3% GDP growth annually before I would even think to break out the champagne.

Rise of the U.S. Dollar: Fall in the U.S. Economy?

At least most asset managers predict the dollar strengthening won’t mean a great sell off, as happened last summer when Ben Bernanke’s stimulus tapering comments led to a huge drop in emerging market stocks. Investors at the time thought that the tapering meant that rate increases were imminent, only to be told later that the economy was much too weak for rate increases anytime soon. Investors are unlikely to jump the gun twice.

For subscribers, in the following section I outline how Global Income Edge portfolio companies can protect investors against deflation and offer global diversification from slowdowns in any one country.

Portfolio

In designing the Global Income Edge portfolios, I looked for companies that could protect against a sudden decline in growth in developed or developing economies by offering diversification – as well as making the portfolio deflation proof by choosing industries that have pricing power.

National Grid (NYSE: NGG) is a good example of a Global Income Edge portfolio company that offers both international diversification and protection against deflation. The energy utility is diversified, with 65% of its operations in the UK and 35% in the U.S. And given the firm has pricing power via regulated rates it sustain profits in periods of deflation. NGG is a buy up to $74

In the healthcare area there’s GlaxoSmithKline (NYSE: GSK) a firm that distributes its pharmaceuticals and consumer healthcare products throughout the world in a sector that clearly has pricing power given the demand for high quality healthcare.

In both 2010 and 2012, GlaxoSmithKline ranked first among 20 global pharmaceutical companies on the Bill and Melinda Gates Foundation’s Global Access to Medicines Index. The firm’s products literally are found around the world and those products include Advair/Seretide for asthma and COPD, products to combat HIV, and also a range of vaccines.

GSK’s products and services span R&D in immuno-inflammation, neuroscience, metabolic pathways, ophthalmology, respiratory, infectious disease and biopharmaceuticals. Its consumer products include Aquafresh and Sensodyne toothpastes, Panadol pain reliever (sold in 85 countries, but in the U.S. we know it as Tylenol), Nicorette and Tums. GSK is a buy up to $54.

Update

In our Aggressive Portfolio:

PDL BioPharma (NSDQ: PDLI) announced on Sept. 17 that its auditor Ernst & Young had resigned. The audit firm has not given a reason why. And the fact that there have been no disagreements or citations in E&Y’s audit reports with respect to the veracity of the firm’s financial statements over the last 2 years – adds to the difficulty in determining how investors might interpret this news. To date, there have been no reports of wrongdoing. We will be monitoring the situation closely, and have the firm under review for a possible ratings change.

The stock of offshore oil driller Seadrill (NYSE: SDRL) has been hurt recently by what we believe is short-term headwinds in the oil market. In the long-term Seadrill, with its more modern deep-water oil drilling rigs, is a long-term value play. The current weakness in oil prices and increased competition in offshore deep-water oil rig markets will serve to displace many of Seadrill’s competitors – which have much older, higher cost rigs.

Seadrill has affirmed the dividend through 2015, and we will be watching closely to see over the next few months how the firm manages these headwinds. SDRL is a buy up to $38.