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- Jul 13, 2018
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Gauging the market impact of election results.
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Key takeaways
Source: FactSet and U.S. Bank Asset Management Group as of November 30, 2024.
“Relative currency values reflect the global flow of funds,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “When the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around.”
“The fundamental factor contributing to currency trends is central bank interest rate policy,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “Earlier in the year, the European Central Bank initiated interest rate cuts, while the Fed delayed cuts.” With markets anticipating the onset of Fed rate cuts, the dollar weakened against the euro. By September, the Fed began cutting rates. But Haworth says markets have since scaled back expectations about the pace of the coming year’s Fed rate cuts. Since the election, markets appear to be reacting to speculation about potential tariff impacts on central bank interest rate policy.
Year-to-date, the dollar has gained just under 5% in value versus the euro.1 As indicated in the chart below, year-to-year changes in dollar-to-euro values have been more muted in recent times compared to the prior decade.
Calculated based on data from the Board of Governors of the Federal Reserve System. *Through November 30, 2024.
Source: FactSet and U.S. Bank Asset Management Group as of November 30, 2024.
Board of Governors of the Federal Reserve System. As of November 30, 2024.
However, a strong dollar can also detract from revenues generated by multinational companies based in the U.S. The net income earned from foreign sales will decrease once exchanged into dollars. A stronger dollar means U.S. companies that export products abroad will be less competitive because of the product’s elevated price when translated into euros or another currency, which can lead to lower sales as foreign buyers shift to lower cost alternatives.
For example, consider the value of an investment in the MSCI European Union (EU) Index. Year-to-date through November 29, 2024, the index, in local currency terms, generated a return of 7.67%. However, the net return for a U.S.-based investor in the index, translated back into dollars, was just 2.66%, due to the dollar’s relative strength in 2024.3 By contrast, when the dollar weakens compared to the euro, it enhances a U.S. investor’s net return after calculating the currency exchange impact.
“Currencies are less volatile than stocks as a whole, and their direction is challenging to predict, given numerous factors that influence relative currency values,” says Haworth. “Equity investors, in particular, should be somewhat insensitive to short-term dollar trends when positioning long-term investment assets.”
While currency considerations may not play a decisive role in your investment strategy, the issue could be worth discussing with your wealth management professional, particularly if your portfolio includes overseas investments.
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Key takeaways
- The U.S. dollar is demonstrating renewed strength against most foreign currencies.
- The trend emerged post-election in apparent response to the possibility that the Trump administration may pursue protectionist trade policies once in office.
- A stronger dollar dampens net returns on overseas investments.
Source: FactSet and U.S. Bank Asset Management Group as of November 30, 2024.
Favorable dollar fundamentals
While the dollar’s rally began prior to November's election, the trend continued after Donald Trump won a second presidential term. Trump regularly campaigned on the theme of implementing more severe tariffs on key trading partners, and shortly after the election, laid out specific tariff proposals that would affect China, Mexico and Canada. Because tariffs tend to be inflation, investors naturally wonder if they could slowdown anticipated interest rate cuts from the Federal Reserve (Fed).“Relative currency values reflect the global flow of funds,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “When the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around.”
“The fundamental factor contributing to currency trends is central bank interest rate policy,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “Earlier in the year, the European Central Bank initiated interest rate cuts, while the Fed delayed cuts.” With markets anticipating the onset of Fed rate cuts, the dollar weakened against the euro. By September, the Fed began cutting rates. But Haworth says markets have since scaled back expectations about the pace of the coming year’s Fed rate cuts. Since the election, markets appear to be reacting to speculation about potential tariff impacts on central bank interest rate policy.
Year-to-date, the dollar has gained just under 5% in value versus the euro.1 As indicated in the chart below, year-to-year changes in dollar-to-euro values have been more muted in recent times compared to the prior decade.
Calculated based on data from the Board of Governors of the Federal Reserve System. *Through November 30, 2024.
The yen proves more resilient
In mid-2024, the Bank of Japan (BOJ), for the first time in 17 years, raised interest rates. This helped strengthen the yen. In the chart below, the declining trend indicates the yen’s increasing value versus the dollar.1
Source: FactSet and U.S. Bank Asset Management Group as of November 30, 2024.
The dollar’s 2024 rebound
“Relative currency values reflect the global flow of funds,” says Haworth. “When the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around.” In 2023, investors perceived that U.S. interest rates were near a peak while still rising in other countries. As a result, more money flowed out of the U.S. This led to a moderate decline in the dollar’s value, but that reversed course in early 2024 as European-based central banks cut interest rates. The nominal broad dollar index, a measure of the dollar’s strength against a basket of global currencies, trended higher, particularly in 2024’s closing months.1
Board of Governors of the Federal Reserve System. As of November 30, 2024.
Economic impact of currency fluctuations
A positive feature of a stronger dollar is the lower cost of imported products from other countries. For example, if a car made in Germany is valued at €50,000 and then is imported to the U.S. when the dollar stands at $1.20 to €1, the retail price of the car in the U.S. would (theoretically) be $60,000 (20% more than its European price to reflect the currency exchange rate). If the dollar strengthened and was valued at $0.90 to €1, the car’s value in the U.S., using the same assumptions, would decline to $45,000, a significant savings for a U.S. consumer.However, a strong dollar can also detract from revenues generated by multinational companies based in the U.S. The net income earned from foreign sales will decrease once exchanged into dollars. A stronger dollar means U.S. companies that export products abroad will be less competitive because of the product’s elevated price when translated into euros or another currency, which can lead to lower sales as foreign buyers shift to lower cost alternatives.
Investment implications of dollar trends
Haworth says the impact of currency movements shouldn’t be a major consideration for investors as they assess the value of specific stocks. The same is not true, however, for U.S. investors who include overseas-based investments in their portfolios.For example, consider the value of an investment in the MSCI European Union (EU) Index. Year-to-date through November 29, 2024, the index, in local currency terms, generated a return of 7.67%. However, the net return for a U.S.-based investor in the index, translated back into dollars, was just 2.66%, due to the dollar’s relative strength in 2024.3 By contrast, when the dollar weakens compared to the euro, it enhances a U.S. investor’s net return after calculating the currency exchange impact.
“Currencies are less volatile than stocks as a whole, and their direction is challenging to predict, given numerous factors that influence relative currency values,” says Haworth. “Equity investors, in particular, should be somewhat insensitive to short-term dollar trends when positioning long-term investment assets.”
While currency considerations may not play a decisive role in your investment strategy, the issue could be worth discussing with your wealth management professional, particularly if your portfolio includes overseas investments.
