How to play the stronger dollar [Quarterly Perspectives]Contributor Global Markets Insights Strategy Team
Some recent developments in global markets could be temporary, but there is widespread consensus that a stronger US dollar is here to stay. Traditionally, emerging markets (EM) have not responded well to a rising greenback. However, these are not normal times for global markets or for US monetary policy. It is worth considering whether the lessons of the past will hold true today, and what a stronger dollar will mean for investments.
Why is the dollar rising?
There are three key reasons for the dollar rise:
- Divergent economic performance: the US economy looks to have grown at a healthy rate of 3% in the second half of 2014 and is particularly strong when compared to the loss in economic momentum in the eurozone, Japan and China in 2014.
- Expected monetary policy divergence in 2015: the US Federal Reserve is expected to raise interest rates, unlike either the European Central Bank or the Bank of Japan who are pursuing expansionary monetary policies.
- Reduced US borrowing from the rest of the world: America’s current account deficit has fallen sharply in recent years, largely as a result of its growing energy independence. Barely a third of the energy that the US consumed last year was imported, down from 60% in 2005.
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The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.