The Strength of the U.S. Dollar | Liz Laprade | Adviser Takeaway

The Strength of the U.S. Dollar—And Why It Matters

Senior Research Analyst Liz Laprade takes a look at the relative value of the U.S. dollar with respect to other currencies—and what it tells us about investing and the economy. She uses the U.S. Dollar Index (DXY Index) to describe the manner in which the greenback has appreciated in recent years. Additionally, Liz explains the importance of geographic diversification and the importance of the dollar for global investors and international companies. If you have questions for Liz, please send them to info@adviserinvestments.com.

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Video Transcript

The relative strength and weakness of the US dollar to other currencies has been making headlines quite a bit recently. So what does the relative value of the dollar tell us about the economy and about where we should be investing?

Hi, I’m Liz Laprade, Senior Research Analyst, with Today’s Adviser Takeaway. Using the DXY Index, which measures the US dollar relative to a basket of other currencies like the euro or the yen, the dollar started to appreciate significantly in May of 2021 until peaking in September of 2022.

Over that time period, the dollar appreciated relative to those other currencies by 24%. For comparison, the average rolling 16 month relative move is only 0.10%. Since that September peak, the dollar declined through January and then we’ve seen it rally a little bit this month in February.

So why do we care? Well, the relative strength of the dollar is important for a few reasons. The first being that the dollar is a safe haven for global investors, so when it starts to significantly strengthen, it’s typically indicating that we are in or may soon be in a risk-off environment. We saw this as the recent rally aligned with the lead up to the start of an equity bear market in 2021 through its most recent bottom.

Second reason is it has implications for international investing. A lot of international companies generate both costs and revenues in the US dollar. So when the dollar is strong, it means not only that, you know, probably means most people could be selling out of foreign companies, but it also means that it becomes more expensive for those companies to operate as they convert costs and revenues from a depreciated currency to a more expensive one. However, this relationship does create opportunities for investing globally.

To put some numbers behind this, using the same dollar index, the MSCI Ex US World Index and the MSCI EM Index, I took a look at time periods where the dollar weekend over a rolling 12 month period. During those times, the average rolling 12 month return for a developed international index was 11% and 18% for emerging-market index, compare this to just 5% and 3% respectively when the dollar is strengthening.

These relationships and potential investing opportunities just reinforce needing to be diversified across geographies. If you had only been invested domestically last year, you’d have probably missed out on impressive foreign returns relative to, say the S&P. Also, this makes a great case for active managers who can strategically invest across changing both currency and economic landscapes and such as we find ourselves in today.

And that will be it for me, I will talk to you all next week!

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