Written by: Alex Dryden
With the U.S dollar having strengthened 6.6% in the last six months, investors are beginning to question whether the dollar has fundamentally changed direction after declining in 2017. We believe that despite the recent jump, the direction of the U.S dollar will be down from here over the long‐term. The three big drivers of currency performance ‐ interest rate differentials, the “twin deficits” and government policy – all suggest a weaker dollar is warranted.
With interest rates in the U.S. significantly higher than rates in the rest of the world, international savers have been flocking to the U.S. markets chasing higher rates of return. This has pushed up the value of the dollar over time, as the demand for dollars has increased (see chart). While interest rate differentials have been responsible for much of the increase in the value of the dollar over the last few years, there are signs this may be changing. With global central banks expected to tighten monetary policy in the next 12‐months, the interest rate gap should begin to close, slowly dragging down the dollar.
The “twin deficits,” the trade and budget deficit, can also be a drag on the value of a currency over time. The U.S. currently runs a trade deficit of 2.5% of GDP and a budget deficit at 3.5% of GDP. Combined, these result in dollars being pumped into the global economy, pushing down the value of the currency over the longer term.
Like deficits, over time, government policy can also have an impact on the value of a currency. In the U.S., for the last 30 years, both Republican and Democrat administrations have pursued a ‘strong dollar’ policy, opting to sacrifice export growth in order to keep a lid on the price of imported goods. However, the current administration seem to be in favor of a weaker dollar. While a government does not have direct control on the value of a currency, they can influence its value via policy and trade decisions.
The three major drivers of the U.S. dollar suggest that the direction of the dollar will move lower over the long‐term. For investors, a weaker dollar will help lift the returns of unhedged international holdings, as well as benefit American companies with significant overseas exposure.
6 Ways to Unwind This Holiday Season
It’s Never Too Soon to Start Estate Planning
Fiduciary and Best Interest Are Not Synonyms
7 Ways to Avoid Arguments During the Holiday Season
The Biggest Risk for Business Owners
A New Wrinkle in the U.S. — China Trade Dispute
Want To Make An Impact? Lead With Humble Pie
How to Go One Step Further with Your 2019 Strategic Plan
Can Verizon Overcome the Acquisition of Aol and Yahoo – That Never Made Sense
What Makes a Great Whitepaper?
Development22 hours ago
Building an RIA Firm for Maximum Value from an Investment Banker’s Perspective
Development22 hours ago
Good? Fast? or Cheap? What Sort of Advice Is It Going to Be?
Financial Podcasts22 hours ago
MarketCounsel Summit Series: The Most Important Data Questions Advisors Are Not Asking—with George Svagera
Financial Podcasts2 days ago
MarketCounsel Summit Series: Turn Fearful Clients into Fearless Investors with Aaron Klein
Research2 days ago
What Brexit and the Ongoing Problems in the European Union Mean For Investors
Building Smarter Portfolios2 days ago
Merger Arbitration Strategies and Protection
Advisor3 days ago
How to Budget for the Holidays
Social Selling3 days ago
As a Salesman I Taught Myself to Market … and You Should Too!