The U.S. Dollar (USD) has declined from the Mar 2020 high of 103.96 to the recent Nov 2020 low of 91.49. The 12% selloff may be the result of the US Dollar rallying sharply during the height of the COVID-19 pandemic during Mar 2020 when investors sought the safety of the US Dollar.
The USD has been in a recovery phase since the 2007-2009 global recession. The question is whether the USD’s downturn is a short-term cyclical move, or if this is a sign of the start of a long-term trend reversal.
Like any asset, class currencies tend to move in cycles. However, there are signs to suggest a new cycle may have started. The FED’s massive monetary policies and the Govt’s fiscal stimulus programs in response to the COVID-19 crisis have led to record deficits which often devalues the Dollar. A declining Dollar can also increase the potential for rising inflation.
When the dollar falls in value, the price of goods denominated in dollars increases. Consequently, US multi-national companies with exposure overseas and foreign equities tend to rise as the dollar weakens. Because imports become more expensive when the dollar falls, foreign companies can buy US-made goods at lower prices.
A weaker US Dollar would benefit commodities and lift the demand for foreign-related stocks. Remember, investors who own international stocks are subject to currency fluctuations. So, if the Dollar falls, the foreign stocks in a stock portfolio are worth more once they are ultimately converted to US Dollar currency. One of the biggest reasons international stocks have badly lagged U.S. stocks over the past decade is because the Dollar has been relatively strong.
In summary, the Dollar is an important factor influencing the trends of different asset classes. When the Dollar’s trend is strong gold, foreign developed, and emerging-market stocks tend to perform poorly. And when the Dollar’s trend is weak, gold, foreign developed, and emerging-market stocks tend to perform well.
It may be too early to determine if the recent US Dollar weakness is a short-term counter-trend decline within an intermediate-term uptrend or if this is the start of the next structural bear decline. However, it is reasonable to expect the performance of US stocks (i.e., US multinational stocks), foreign stocks, emerging-market stocks, emerging-market debts, cryptocurrencies, and commodities will depend heavily on the longer-term trend of the US Dollar.
Enclosed below are charts of the US Dollar Index (USD), CRB Commodities Index (CRB), MSCI EAFE (EFA), MSCI Emerging Markets (EEM), MSCI All Country World Index ex-USA (ACWX), Vanguard All-World ETF (VEU), and Global 100 ETF (IOO).
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