The U.S. Dollar Falls

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

The value of the U.S. dollar continues to fall against its major trading partners, due to a potent concoction of politics and surprising economic growth abroad.

U.S Dollar Index

Source: Bloomberg, as of 1/25/18 Past performance is not indicative of future results. Investments cannot be made in an index. The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Click here for more information on the basket.

What Does That Mean?

The dollar, as measured by its value against a basket of currencies, has fallen more than 2.5% already this year, following a 7% decline in 2017. A broader trade-weighted basket of currencies measured by the Fed is less severe, but nevertheless, dollar weakness was particularly apparent this week.

U.S. politics deserve some credit. U.S. Treasury Secretary, Steve Mnuchin, asserted that a weaker dollar is good for the U.S., as it “relates to trade and opportunities”. This comment runs counter to nearly 25 years of U.S. Treasury strong dollar policy. Markets are speculating whether a policy shift is occurring, but Secretary of Commerce, Wilbur Ross, subsequently denied it.

The dollar’s weakness may be more correlated with strong global growth – particularly in Europe. The euro-area economic strength continues to exceed consensus forecasts, and European PMIs (surveys of manufacturers) released yesterday signal further progress ahead.

Figure 2: Dollar Weakness or Euro Strength?

EUR/USD Exchange Rate

Source: Bloomberg, as of 1/25/18. EUR/USD Spot Exchange Rate where the price of 1 euro is in U.S. dollars.

Why Does It Matter?

A weak dollar has implications for many investments and asset classes. We see three particularly important ones:

  1. A weak dollar is indirectly bad for bonds, as it leads to higher inflation (imported goods cost more) and thus a potentially more hawkish Federal Reserve.
  2. A weak dollar tends to boost globally-traded commodities, like crude oil and gold, as they become relatively more expensive in dollar terms. We expect higher prices to translate to better earnings in the energy and materials sectors.
  3. A weak dollar favors larger multi-national companies over smaller companies, as U.S. exports become relatively cheaper and more competitive in global markets, and overseas revenues are boosted in USD terms.

Bottom Line

The dollar’s current weakness will certainly create winners and losers, and the impact on foreign investors’ appetite for U.S. equities and fixed income will be important to watch. Looking ahead, the dollar could strengthen from here; however, currencies are notoriously difficult to predict. As such, it may be futile to speculate on the direction of the trade. Investors may be well served by removing currency volatility from their investments with a 50% hedge.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Funds. Indices are unmanaged, include the reinvestment of dividends, and cannot be purchased directly by investors. Past performance does not guarantee future results.

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.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team

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