The Almighty Dollar

Heading into the final third of the investment year there are few sure things for investors to count on. One sure thing, however, is the US dollar. It has been appreciating slightly for years, and has been strong even though the US economy would be doing better with a slightly weaker dollar. Why do we believe dollar strength will persist?

The only game in town

The major currencies competing for strength on the international scene are the euro, yen and pound. All have problems much bigger than the dollar and all are much smaller currencies. No currency has yet credibly challenged the dollar despite many tries. Thus, the incumbent’s advantage and momentum are two long-standing features of the greenback.

The Dollar Index

Bloomberg maintains a dollar index (DXY) that makes it very easy to track the value of the dollar over any timeframe. DXY tracks the value of a dollar versus a basket of currencies, primarily the euro (57%), the yen (14%) and the pound (12%). DXY stands at almost exactly the same price now (98) as the start of the year. Over a longer period of time, say three years, the dollar has gone as low as 89 in January 2018 and as high as 102 in December 2016. The index went to its current level of 98 in January of 2015 when the Fed started raising short-term rates. When looking at the index you can see short-term periods of fluctuation but less volatility over a longer time horizon.

The rest of the year

President Trump has been using the dollar as a heavy tool to persuade our trading partners to buy more American goods. He has started criticizing the high price of the dollar, an unprecedented move by any US president. Fortunately, the value of the dollar does not depend on what a US president says. It depends more on Fed action and the Treasury Secretary comments, which have been non-committal. One or two more rate cuts are widely expected by the Fed this year with perhaps an accompanying slight decline in the dollar. There is no indication of a large move either way of more than 3% in the dollar. I think all investors and CEOs can live with that kind of mild volatility.

There is a small danger that the dollar trades outside its normal range. If this occurs for an extended period, it can signal events we’d rather not see happen. For example, excessive dollar strength could indicate the rest of the world is in or near a recession while a very weak dollar could indicate a major slowdown in our own economy. I don’t see any signs of those two events happening.

For investors with US dollars

Our client portfolios are overwhelmingly priced in US dollars, anywhere from 60-80 percent. We selectively use non-dollar stock investments when they offer higher dividend yields or have price earnings ratios much lower than the US. We are confident about the stability of the US dollar because it is the reserve currency of the world and because it has proven to be fairly stable through an unpredictable US presidency. It is in the best interest of all countries, even our current trade adversary China, for the US dollar to remain stable. In conclusion, our advice is to keep the dollar foremost in your portfolio.