over 3 years ago • 2 mins
The dollar’s worst month in a decade has left its value down 9% against other currencies since March – and a longer-term dip may require investors to make some adjustments 🛠
After climbing nearly 40% over the past decade, the dollar’s international value is in decline. Investment bank Goldman Sachs is among those predicting further falls to come – estimating that the euro’s relative worth, for example, will rise another 6% in the next year.
According to brokerage firm Charles Schwab, the dollar’s downwards direction is dictated by four factors. First, Federal Reservepolicy, combined with forecasts of slowing US economic growth and growing inflation, has reduced real interest rates below zero – making the country’s currency relatively less attractive.
Furthermore, America’s recovery from coronavirus looks likely to lag other countries’ – while greater uncertainty over its domestic and international politics may, absent any fresh crisis (where the dollar is seen as a “safe haven”), encourage investors to send their money elsewhere. Finally, rising US budget deficits will have to be funded by more foreign investment 🤝
Schwab sees the dollar slowly falling a further 5-10% over the next couple of years – although in the absence of any viable alternatives, the US currency is unlikely to lose its “global reserve” status. And such a cyclical decline isn’t necessarily a bad thing.
A weaker dollar should support global economic growth, especially among commodity exporters and emerging markets. With both their goods and their government bonds typically priced in dollars, the former become more affordable for buyers and the latter more affordable for the countries themselves. Investors with globally diversified exposure accordingly stand to benefit.
It’s true that a declining dollar also makes US investments more attractive overseas – potentially supporting stock price rises, especially at multinational companies which get a lot of their revenue from overseas. More affordable US exports might also give the US economy a boost over time, while stronger currencies in Japan and Europe may temper growth there.
Nevertheless, with the tea leaves suggesting the dollar could drop further, now might be a good time to increase your portfolio’s international exposure – and to emerging economies in particular 😉
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