The Dollar So Far
Go figure. Many had predicted that the U.S. dollar would strengthen in 2017, based on an improving domestic economy and the Fed’s well-telegraphed plan to raise interest rates, among other factors. But, here we are heading into the fall, and the dollar has refused to cooperate. As of the end of September, the dollar was down about 10% year-to-date, according to the ICE U.S. Dollar Index, an index based on a basket of currencies that includes the euro, yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. The WSJ Dollar Index, which incorporates a broader range of currencies, has shown a similar decline.1
All this may change. The dollar saw a modest bounce in the wake of last month’s Fed announcement that it planned to start selling off the $4.5 trillion in assets now sitting on its balance sheet, but that upward move was short-lived: a day later, it was back about where it started. But not everyone is throwing in the towel on a rally. According to a recent Bloomberg story, some hedge fund managers have been moving aggressively into the U.S. currency. Noting that the dollar is in the midst of its biggest downturn in a decade, they expect that trend to reverse.2
It has seemed of late that the world has entered a new period of global uncertainty and some of that is going to be reflected in the movement of the major currencies. At the same time, central banks remain all over the lot, with tightening underway in the U.S., easy money in Japan, and the Euro zone getting closer to some kind of normalization, as the economy there strengthens. Wild cards continue to emerge; most recently, the dollar rose against the yuan in mid-September, following a downgrade in China’s credit rating by S&P.
The takeaway for most investors is not that the dollar is up, or down, or sideways, for that matter. It’s that even the big money has a hard time predicting where the currency is heading. For the average investor in non-U.S. dollar-denominated assets, the day-to-day jockeying among the players can be a little dizzying. If the goal is to gain exposure to European or Asian equity or fixed-income markets, currency values are, at best, a secondary consideration. As we have noted before, these swings have tended to even out over time, while some degree of hedging (we like 50%) can help dampen volatility.
There’s noise in the markets wherever you look, and currencies are often one of the louder corners. Most, however, would be better served by dialing this out and keeping focused on their long-term objectives.
Discover the Importance of Currency HedgingThe Benefits of Managing International Equity Currency Risk with a 50% Hedging Strategy
1. Bloomberg, as of 9/15/17.
2. Nguyen, Lananh, Bloomberg.com,“Managers of $3 Trillion Buy Dollar Amid Worst Rout in Decade.”
All investments are subject to risk and will fluctuate in value. Past performance is not indicative of future results. An investment can’t be made in an index.
The ICE U.S. Dollar Index (USDX) is a leading benchmark for the international value of the U.S. dollar and the world’s most widely-recognized traded currency index. In a single transaction the USDX enables market participants to monitor moves in the value of the U.S. dollar relative to a basket of world currencies, as well as hedge their portfolios against the risk of a move in the dollar.
The Wall Street Journal Dollar Index (WSJ Dollar Index) is an index (or measure) of the value of the U.S. dollar relative to 16 foreign currencies.
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