Download Putting a Strengthened US Dollar in Perspective

Putting a Strengthened US Dollar in Perspective
Since the United States began its slow recovery from the aftereffects of the financial crisis and recession, the dollar has
been on the rise. The Federal Reserve Board’s trade-weighted index of foreign currency values shows that the overall
value of the dollar increased 10.9% from its post-recession low on May 2, 2011, to Sept. 20, 2013. More than a quarter of
that increase—3%—occurred in 2013.1
But as the accompanying graph illustrates, the dollar has actually trended downward for decades, but with sharp turns
associated with major macroeconomic events such as the oil price shocks of the 1970s, the collapse of oil prices in the
1980s, and the stock market and real estate bubbles of more recent years.
Moreover, while the dollar may now be experiencing an upswing, on average, there are significant differences from
country to country. For example, the dollar could have bought more euros and Mexican new pesos on Sept. 20, 2013, than
at its overall low point on May 2, 2011. But at the same time, it could have bought fewer Chinese yuan renminbi.2
The Ups and Downs of the Dollar
160
Crude oil prices drop to post-embargo low.
140
Stocks indexes reach peaks during
the technology bubble.
Index value
120
100
80
Crude oil prices peak
after the Arab oil
embargo.
Property prices
decline after the real
estate bubble.
60
40
1973
1978
1983
1988
Trade Weighted U.S. Dollar Index
1993
1998
2003
2008
2013
Long-Term Trend of the Index
The Federal Reserve Board's trade-weighted dollar index charts the strength of the dollar
relative to the currencies of our major trading partners since 1973. Late September 2013
index values suggest that the greenback may be recovering from its post-financial-crisis
low. But overall, the dollar's relative value has been trending lower for decades as the
United States' dominance of the post-World War II global economy waned. In that
context, the dollar's value may now be near its long-term normal level.
Source notes: Currency values are represented by the Federal Reserve Board of Governors
Trade Weighted U.S. Dollar Index Daily Values (Major Currencies) , Jan. 1, 1973, to Sept. 20,
2013, retrieved from
http://research.stlouisfed.org/fred2/series/DTWEXM/downloaddata?cid=105. The longterm trendline is the straight line that represents the observed price points with the least
total variation from actual. The West Texas Intermediate Crude price per barrel peaked in
July 1980 at $39.50 and fell to $11.58 by July 1986, according to data compiled by the
Federal Reserve Bank of St. Louis, retrieved from
http://research.stlouisfed.org/fred2/series/OILPRICE/downloaddata?cid=32217. Home
prices peaked during the first quarter of 2007 and then declined steadily (by a total of 18%)
until the second quarter of 2011, according to data compiled by the Federal Reserve Bank
of St. Louis, retrieved from http://research.stlouisfed.org/fred2/data/USSTHPI.txt. The
U.S. stock market as represented by the S&P 500 reached a peak of 1527.46 on Mar. 25,
2000. Past performance does not assure future results. Investors cannot invest directly in
any index. Index values do not represent any particular transaction.
Significance of Dollar Volatility
The recent strengthening of the US dollar has been a two-edged sword in global finance. It has tended to make the cost of
US products higher for foreign consumers, since they must offer greater amounts of their currency to get the same value
in dollars. Similarly, it has tended to lower the cost of imported goods in the United States, where consumers need offer
fewer dollars in order to obtain the same amount of goods or services in foreign currency.
How long could this trend continue? During the financial crisis, the value of the dollar increased as investors around the
world bought dollars because it was perceived as a safe haven. As the sense of crisis ebbed, many investors sold those
dollars and equilibrium returned to the market. The current strengthening trend, however, does not appear to be crisisdriven in the same way. Rather, it appears to be the result of some combination of economic growth and global investors’
desire for more attractive interest rates.
From the perspective of an American investor, the strengthening dollar means that the returns of existing foreign
investments tend to be reduced since money earned overseas would be able to buy fewer dollars when brought home. But
it could also make new asset purchases in foreign countries more attractive, since a stronger dollar could buy the samesized foreign asset portfolio with fewer dollars.
Investors who hold foreign stock portfolio should put the current upswing in perspective. Think twice before selling any
foreign stock simply because the present currency translation effect might look unfavorable. Share prices can be affected
by a wide range of factors, from individual business plans to the overall health of the local economy. Currency moves
alone rarely alter the fundamental prospects of a sound company. That said, there may be good reasons to consider buying
or selling specific investments in response to market changes.
You might also consider hedging strategies. Global business firms often use currency derivatives to hedge against sharp
price changes caused by foreign exchange volatility. However, hedging involves its own risks and many professional
money managers eschew it, either because they believe that ups and downs tend to cancel each other out, or that the
currency markets add important diversification benefits.
Let me work with you to find out how the strengthening dollar may be impacting your portfolio and to help you
determine an appropriate strategy to meet your needs.
Sources
1
Source: The Federal Reserve Board of Governors, Trade Weighted US Dollar Index (Major Currencies) daily values,
retrieved from http://research.stlouisfed.org/fred2/series/DTWEXM/downloaddata?cid=105. This index is a weighted
average of the foreign exchange values of the US dollar against the currencies of major US trading partners. It does not
represent any specific currency and cannot be used to value any investment. According to the Business Cycle Dating
Committee of the National Bureau of Economic Research, the most recent recession ended in June 2009. The currency
index value on June 30, 2009, was 77.77; on May 2, 2011, it was 67.98; on Jan. 2, 2013, it was 73.25; and on Sept. 20,
2013, it was 75.42.
2
Source: The Federal Reserve Board of Governors H10 release, Foreign Exchange Rates. The indicated currency values
were retrieved from http://research.stlouisfed.org/fred2/categories/94 and represent average noon buying rates in New
York City for cable transfers payable in the indicated foreign currencies as reported to the Federal Reserve on the
indicated dates—$1 to 0.68 euro on May 2, 2011, 0.74 euro on Sept., 20, 2013; $1 to 11.5 Mexican new pesos on May, 2,
2011, 12.8 Mexican new pesos on Sept., 20, 2013; $1 to 6.5 Chinese yuan renminbi on May, 2, 2011, 6.1 Chinese yuan
renminbi on Sept., 20, 2013.
Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.
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