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Re: The dollar being strong against the Euro

May 26, 2023, 7:46 AM

RememberTheDanny
That's odd, as I don't subscribe either. I'll cut and paste it - left out the last couple of sections of investment advice. Here you go...

The U.S. dollar is hot these days. That’s creating both risks and opportunities for investors.

As an investor, you generally want to be more vigilant when investing in companies that do business overseas due to the relative value of the U.S. dollar. Changes in the dollar’s value can have a big impact on a company’s international sales, since it can erode their competitiveness in any market whose currency is cheaper than the greenback.

In contrast, certain stocks have a track record of being helped by the rising dollar—we name names later on.

We also look at an exchange-traded fund whose value is directly linked to the dollar by tracking the U.S. Dollar Index (USDX), which measures the value of the greenback versus a basket of six key foreign currencies.

Likewise, we tell you which ETFs benefit indirectly from a strengthening dollar by betting against weaker foreign currencies.
U.S. Dollar: How Strong Is It?

The U.S. Dollar Index started 2022 in a solid uptrend. From late April through late September, the Dixie—as the index is often called—ripped to new 20-year highs. U.S. tourists traveling abroad were big beneficiaries, but the dollar’s rapid climb pressured earnings growth for U.S. companies that have overseas units.

The dollar started to cool in the final quarter of 2022 as the Federal Reserve hammered rising inflation with interest rate increases.

So far in 2023, inflation and interest rate expectations have whipsawed back and forth. The dollar has responded largely in kind. In early March, the dollar hit its highest level since November, before investors’ concerns over stability of the U.S. banks triggered a sharp reversal.

The USDX is down 2.5% year to date as of May 12, and it has lost 1.9% over the past 12 months.

With the U.S. economic outlook for 2023 uncertain, the path forward for the U.S. dollar could have significant implications for inflation, international trade, technology stocks and fiat currency alternatives such as gold and Bitcoin (BTC).
Why the Dollar’s Value Rises

U.S. investors typically measure the value of goods, services and investments in dollars. But the buying power of a single dollar also changes over time. A strong dollar reflects an increase in the dollar’s value relative to other currencies around the world.

There are a number of reasons the dollar gains strength in the market. In the past year, the Fed has raised interest rates eight times to a current target range of between 4.5% and 4.75% in an aggressive attempt to curb inflation. The higher interest rates rise, the more demand for the dollar there is from international investors seeking yield.

Why? As the Federal Reserve Bank of St. Louis explains, “If the Fed raises interest rates while other central banks maintain or even lower their interest rates, then the return on savings is more attractive in the U.S. than in other countries. Given this higher rate in the U.S., international capital should flow from other countries to the U.S., resulting in the dollar’s appreciation.”

The dollar is also the world’s reserve currency. Investors see it as a safe haven during periods of economic uncertainty and instability. Investors concerned about a global economic downturn, the war in Ukraine, or the recent failures of U.S. banks SVB Financial (SIVB), Signature Bank (SBNY) and Silvergate Capital (SI) can seek shelter and security in the dollar.

Also, investors sitting on the sidelines and waiting for a better time to buy stocks can currently earn an interest rate of 4% or higher on the dollar in top high-yield savings accounts. These accounts are essentially risk-free for balances of up to $250,000 per bank, as long as the bank is insured by the Federal Deposit Insurance Corporation (FDIC).
How Strong Is the Dollar?

The widely-traded currencies that the U.S. Dollar Index compares the dollar’s strength to the euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK) and Swiss franc (CHF).

Investors can also monitor how strong the dollar is relative to specific currencies.

Here’s how the dollar compares to major currencies as of May 12:

EUR/USD: One euro buys $1.09 now, compared to $1.04 a year ago
USD/JPY: One dollar buys 134.85 yen, versus 128.26 a year ago
USD/CHF: One dollar buys 0.89 Swiss francs, versus 1.00 a year ago
GBP/USD: One British pound buys $1.25 now; bought $1.22 a year ago
USD/CAD: One dollar buys C$1.35 now, compared to C$1.30 a year ago

In most of the major currency pairings, the U.S. dollar gained strength over the past 12 months.

Looking ahead, LPL Financial chief global strategist Quincy Krosby says the strength of the dollar will continue to be tied closely to U.S. inflation and interest rates.

“While the Fed remains steadfastly data dependent, the dollar’s course as well remains focused on inflation and the Fed’s monetary response,” Krosby says.