Reviewing the historical strength of the U.S. dollar
May 9, 2023
Welcome to Wealth Enhancement & Preservation’s Market Minute, where we get to update you on everything that happened in the financial markets this week. My name is Jake Sanders, and I am a partner at Wealth E&P and operate as a Wealth Advisor and Certified Financial Planner. I hope you're having a fantastic week so far.
One theme we've been focusing on this year has been the U.S. dollar. Now, this is mostly around interest rates, inflation, and what the Fed is going to do or what their policy may be. I wanted to continue that theme a little bit today, but I wanted to do it by posing a question: where do you think the U.S. dollar is (relative to its peers) compared to 25 years ago? Do you think it's stronger? Do you think it's weaker now?
While you think about that, I wanted to share this chart above of the ICE U.S. Dollar Index (DXY). This shows the relative strength of the U.S. dollar compared to a basket of six other currencies. What you may be surprised to see is that the U.S. dollar is actually 2.42% higher today than it was on May 7, 1998. In other words, the U.S. dollar is stronger. What are the takeaways of this?
Among other things, you can also see that there are a lot of ups and downs here; we call this behavior volatility. The U.S. dollar actually peaked out during this time over 120 and its low was 71. With that, even for seasoned professionals, it is very hard to predict where the U.S. dollar might go. This chart is not meant to be predictive, but it is also very tough to discern where it might be going. You might be surprised to know that it is actually stronger than it was 25 years ago.
Finally, and I think most pertinently, as I already said: the U.S. dollar is stronger today than it was then. According to First Trust in a recent market commentary, this is caused by three different things: quantitative tightening, the Fed raising of interest rates, and foreign investment in the US dollar as a safe haven, especially in times of political turmoil as we've had in Russia and Ukraine. Foreign investment in the U.S. dollar is probably the most important factor here.
If you have questions about how we're handling this and how this might impact your portfolios, we’d love to chat with you about it. If you have any other questions about the stock market or the economy in general, please feel free to reach out or visit www.wealthep.com. Otherwise, stay tuned for our next Market Minute! We appreciate you, and we hope you all have a great week.
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