What’s Up with the Dollar?
As is often the case in reading tea leaves (or before that, entrails), the future is in the eye of the beholder: what’s objectively in front of you is open to interpretation.
The same can be said of the global currency markets, as they continue to perform in ways both predictable and confounding. The U.S. economy is in good shape and growing, and the Federal Reserve has indicated it will continue to lift interest rates, as planned. That should be supportive of the dollar, but you wouldn’t know it from its 2017 performance.
The past year saw the ICE Dollar Index – which measures the dollar against a basket of six other currencies – fall nearly 10%, the biggest drop since 2013. (The six currencies are the Euro, the Yen, the British Pound, the Canadian dollar, the Swedish krona, and the Swiss franc.) At the end of last year, it had declined more than 12% against the Euro, 8.6% against the Pound, and 6.4% against the Chinese renminbi.1 This decline persisted, despite multiple interest rate hikes on the part of the U.S. Federal Reserve and the possibility of trillions of dollars being repatriated, post-tax reform.
The current year started out much the same way, but then shifted gears. Since January, the dollar has more or less ‘round tripped’ against the Euro, starting the year at around $1.20, rising to a high (so far) of $1.25, and then returning to $1.21 on April 26, 2018. According to The Wall Street Journal, this newfound dollar strength reflected in part a sense that “global growth momentum may be shifting back to the U.S. and away from other major economies.” Expectations that the Fed will continue to raise interest rates is seen as providing further support for the U.S. currency.2
What can’t help but strike the casual observer (again) is the highly unpredictable nature of currency movements. There are well-reasoned opinions, as to the why the dollar should go higher from here. Others argue just as persuasively that it has topped out, that it’s due for a decline, and that what we’re currently experiencing is nothing more than a bear market rally.
For U.S.-based investors who have, or are looking for, exposure to non-U.S. markets, this highlights, once again, the risk in tying an investment portfolio to the short-term gyrations of any particular currency. Whether being long or short, the dollar can add volatility without necessarily adding value over time. A neutral currency position through a partial hedge can provide international exposure, while helping to manage the sometimes turbulent currency ride.
1. Nelson, Eshe, ‘Soggy Dollar,’ December 30, 2017, www.qz.com.
2. Iosebashvili, Ira, ‘Dollar Roars Back as U.S. Growth Story Wins Over World Markets,’ April 29, 2018, www.wsj.com.
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The information and opinions contained herein are for general information use only. IndexIQ does not guarantee their accuracy or completeness, nor does IndexIQ 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 as of the date of this report and are subject to change without notice. Past performance is no guarantee of future results.
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ICE Dollar Index measures the dollar against a basket of six other currencies: the Euro, the Yen, the British Pound, the Canadian dollar, the Swedish krona, and the Swiss franc.
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