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The Strong US Dollar

by Michael Binger, CFA

Posted on July 11, 2018

In 2018 investors have had plenty to focus on between tariff talk, rising interest rates, North Korea and weak emerging markets. One thing not being discussed as often is the strengthening of the US dollar. Since the end of January the US dollar has strengthened substantially versus other major currencies around the world (highlighted by the red arrow in the illustration below).

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The US dollar is also approaching its five year high again that was last seen in early 2017. What’s caused the recent strength in the dollar?

  • The US economy has become stronger relative to international economies
  • The US central bank is raising/normalizing interest rates, while international central banks continue to keep their rates low
  • Global trade tariff rhetoric has increased encouraging investors to seek US dollars as a safe haven currency
The factors above have all contributed to the dollar’s recent rise and investors have sold international currencies and bought dollars. What are the ramifications of a stronger dollar that we need to consider?
  • The US trade deficit is likely to rise as US consumers use a strong dollar to buy increasing amounts of goods and services produced overseas
  • Emerging markets are negatively affected as they require increasing amounts of their local currency to purchase dollar based commodities, debt, etc
  • US companies who sell product overseas will see a sales and earnings headwind as they translate weaker international currencies back to US dollars
Assessing currency movements is difficult. But longer term we believe the dollar will be lower than where it is today, due to the large US trade deficit and mean reversion of international interest rates and economic growth. In the short term however, the continued strength in the dollar could persist. This would be a headwind to portfolios that invest overseas, such as the G40i, positions in the Endowment portfolios and the GTR when/if it’s invested outside of the US.