The U.S. dollar has been in the headlines due to an anticipated pause in Fed policy and concerns over the currency's place in the global financial system. However, to borrow Mark Twain's famous line, reports of the dollar's death are greatly exaggerated. While the role of the dollar has declined by some measures over the past two decades, fears of the dollar's demise are not new among investors and economists. What does the dollar's role mean for investors going forward?
We discuss in this episode of The Wealth Effect Podcast:
💲 U.S. Dollar Index (DXY)
🌎 Global Bank Reserve and Trade Weightings
🏦 Currency Impact on Asset Class Performance
Matt Faubion, CFP®
Founder - Wealth Manager
Show notes and charts:
The dollar remains strong but has weakened over the past six months
The value of any major currency reflects a wide array of global economic trends and, as a medium of exchange, permeates every part of the global economy. The dollar plays a central role in this dynamic.
The dollar reached parity with the Euro last year
According to the IMF, the dollar comprised 58% of the world's currency reserves held by central banks at the end of 2022. The Euro held the next largest share at 20%, followed by the yen and the British pound at 6% and 5%, respectively. The Chinese renminbi trails far behind at only 2.7%
The global payments numbers tell a similar story. According to SWIFT, a major global payments network, the dollar was used in 41% of transactions. This compares to the Euro, pound, and yen with 36%, 7%, and 3%, respectively. Only 2.2% of SWIFT transactions used the renminbi
A weaker dollar is a tailwind for international investments
When the dollar strengthens, international investments lose value for dollar-based investors since they are made in foreign currencies, which become weaker. This dynamic hurt foreign returns last year, alongside many other challenges. Fortunately, it's the direction and not the level that matters, and the weakening dollar has helped to push international returns higher this year.
The bottom line: There will always be concerns about the dollar's place in the global economy. Investors should maintain a broader perspective on why the dollar plays such an important role and focus instead on how the dollar impacts the economy and investor returns.
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