24 Oct 2022
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.[1] 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.
[1] Source: Bloomberg
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