What does that mean for investors?
The U.S. dollar has appreciated approximately 40% against a market basket of foreign currencies over the past 10 years. In our opinion, as of late, the reason for this near distinct run is interest rate differentials. Interest rates in the U.S. are simply higher and rising faster than in most other first world countries. Foreign investors can store money in the U.S. at higher yields than in their home countries. When money flows into the U.S., investors must sell their local currency and buy U.S. dollars. We think this will likely continue if the Fed continues to raise the Fed Funds Rate faster and to higher levels than competing foreign markets.
U.S. Dollar strength
4 implications that investors should know:
- International investments made by U.S. investors have lost return due to foreign currency erosion. This might explain much of the relative underperformance of international investments relative to U.S. capital markets.
- Now, U.S. investors placing money abroad have more purchasing power. Just as a strong dollar makes international travel or purchases less expensive to U.S. consumers, it also makes international investments cheaper in dollar terms. Simply put, the same dollar now purchases more international stock than before.
- U.S. businesses that export are likely to see a decline in their earnings. U.S. goods and services are now more expensive for foreigners to purchase, and they are likely to purchase less.
- International businesses that export to U.S. should see bump in earnings for the same reason, but in the opposite direction.
 Source: Bloomberg
Information provided herein reflects Frontier’s views as of the date of this document and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.
Frontier Asset Management is a Registered Investment Adviser. The firm’s ADV Brochure and Form CRS are available at no charge by request at email@example.com or 307.673.5675 and are available on our website www.frontierasset.com. They include important disclosures and should be read carefully.