A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

November 24, 2014

King Dollar? Not quite...
US Federal Reserve Trade-Weighted Broad Dollar Index

chart

Source: US Federal Reserve via Bloomberg, as of 10/31/14. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The US dollar has strengthened against most currencies this year continuing a gradual uptrend that began several years ago.
  • That's largely due to the better relative growth prospects (and better risk-adjusted return expectations) in the US—driving up demand for US$ as other currencies must be converted before investing in US assets.
  • While recent moves in the US$ have already had an impact on financial markets, commodity-dependent economies and the terms of international trade, it's important to keep recent gains in perspective. Indeed, they are still rather modest relative to the two previous strong dollar cycles.
  • Using the Federal Reserve's Trade-Weighted Broad Dollar Index as a guide, the US$ had only strengthened about 9% through October 2014 from its all-time low of 80.54 in July 2011.
  • By comparison, during the 1978-1985 strong dollar cycle, the value of the US$ increased by 52% – and during the 1995-2002 cycle, its value rose by 33%.
  • In fact, at the October 2014 level of 87.7, the index value was still about 9% below its 40-year average.
  • Of course, the world economy is much different now than 35, or even 15 years ago. Emerging markets account for a greater percentage of global GDP, China is a far greater global economic force, and a whole new currency (the euro) has come into existence. Nothing says for sure that the US$ will follow the tracks of any previous cycle.
  • But if it does, continued shifts in expectations for economies, companies and asset prices could afford conscientious investors with new opportunities to capture value in global markets.

The chart:

  • The chart shows the Federal Reserve's Trade-Weighted Broad Dollar Index and its average level over the past 40 years.
  • During both previous strong dollar cycles, it took seven years for the index value to move from its lowest point to its highest point.

Definitions:

A risk-adjusted return is a measure of performance relative to its level of risk exposure over a given period of time.

The Federal Reserve Trade-Weighted Broad Dollar Index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

Developing economies are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as emerging markets or less developed countries.


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Unless otherwise noted the "$" (dollar sign) represents U.S. dollars.

Past performance is not a guarantee of future results.

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Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.

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Previous Editions

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Poll

What would be the best news for markets for the remainder of the year?








Poll

What would be the best news for markets for the remainder of the year?

Strong US corporate earnings validate US economic expansion
(36%)
Strength in the US dollar convinces the Fed to keep short rates low longer
(4%)
European Central Bank bond buying rekindles growth in European Union countries
(56%)
Growth in China strong enough to leave room for financial system and structural reform
(4%)



Previous month Poll

Which Asian country will have the strongest growth in the coming year?

Japan, as Shinzo Abe's policy initiatives take hold
(17%)
India, as Narendra Modi's new government enacts changes
(45%)
China, as Xi Jinping's reforms promote a stronger financial sector
(17%)
South Korea, as President Park Geun-hye's plan to boost growth bears fruit
(21%)