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U.S. Dollar Rises Again This Week

09/19/2014

Over the past few weeks I have been intently focused on the value of the U.S. Dollar Index (Figure 1). Certainly Europe’s and Japan’s central bank policies are weighing on the eurocurrency and yen, which in turn is increasing demand for the U.S. dollar. Investors should not anticipate much change; beyond the easy monetary policy overseas, the U.S. economy is rebounding with the strongest momentum globally.

Here are few of the impacts a rising U.S. dollar could have on select asset classes:

  1. The strengthening dollar combined with lower gasoline and food prices provide a strong tailwind to the U.S. consumer. In years past investment strategies were formulated around the strength of the emerging market consumer. What we have witnessed in mid-2014 is a shift in which investment strategies should consider first the strength of the U.S. consumer.
  1. In the coming weeks, S&P 500® Index (SPX) companies will report earnings for the calendar third quarter. With the U.S. dollar rising nearly 5.5% during the quarter, be alert to management’s comments on the conference calls of large U.S. multi-national corporations. I would expect a negative impact and a negative guidance slant for those SPX companies that derive significant revenue outside the United States. Following earnings there will be a need for investors to make the distinction between U.S. domestic-oriented corporations and U.S. multi-nationals.
  1. Emerging market asset classes will be affected by the rising U.S. dollar and by expectations that the FOMC is six months away from a modest fed funds rate hike. However, there is not enough evidence to suggest that the impact will be as broadly negative for emerging markets as in 2013. I would expect emerging market currencies to be the most impacted, followed by emerging market equities to a lesser extent, and emerging market debt the least impacted. Emerging economies, such as India, have embarked upon aggressive fiscal measures this year to reduce account deficits.

Figure 1: U.S. Dollar Index, September 2013 – September 2014
Figure 1: U.S. Dollar Index, September 2013 – September 2014
Source: Bloomberg

Past performance is not a guarantee of future results.

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