The Bottom Line
- So far this year, the U.S. dollar has weakened about 8% against a trade-weighted basket of major world currencies.1
- While many variables can contribute to the relative value of a currency—some less than obvious—this recent downturn has been widely attributed to three related factors: 1) improving global growth relative to the U.S, 2) changes in expectations about central bank policies—with greater prospects for tightening by the European Central Bank (ECB) and lower prospects for the U.S. Federal Reserve (Fed), and 3) political uncertainty in the U.S.
- Consider eurozone growth: recent data suggests that 2Q17 could be the strongest quarter in more than six years, and explains why markets believe the ECB could soon shift to a less accommodative stance.
- At the same time, stubbornly low inflation has markets reconsidering the Fed’s appetite for more rate hikes this year.
- Whatever the causes, a weaker U.S. dollar could be beneficial for U.S. economic growth, since it makes U.S. exports cheaper to trading partners, all other things being equal.
- Coupled with stronger global growth, a weaker dollar could therefore mean a brighter earnings outlook for U.S. companies that sell a lot of goods and services abroad.
- That could have a ripple effect, improving the earnings outlook for companies that aren’t major exporters but do business with US exporters.
- Investors looking to potentially capitalize on this shift may find it advantageous to consider active managers that can tilt portfolio allocations toward those companies that are possible beneficiaries.
1 Source for all data is Bloomberg, as of 7/25/17.