A privilege – a special right, advantage, or immunity granted or available only to a particular person or group – is one thing. An exorbitant – exceeding the customary or appropriate limits in intensity, quality, amount, or size – privilege is a different matter altogether and how some 60 years ago, Valery Giscard d’Estaing, then French Minister of Finance, famously referred to the benefits that accrue to the U.S. given our currency – the U.S. dollar – was the world’s reserve currency. That dynamic persists to this day, as the U.S. continues to print the world’s most important and most transacted-in currency, which means, among other things, that we should never be exposed to exchange rate risk, among other currency-related challenges that most countries regularly confront.
We have been thinking about the U.S. dollar as it just came within a whisker of hitting a 20-year high relative to a basket of world currencies, per the ICE U.S. Dollar Index (see chart). As to why the U.S. dollar has been doing so well of late, market participants would likely point to the Federal Reserve aggressively raising interest rates in the face of historically high inflation; strong economic fundamentals (the U.S. created 528K jobs in July and our unemployment rate is 3.5%) and global capital seeking safe harbor during very uncertain geo-political times (consider the economic and energy challenges facing Western Europe due to Russia’s invasion of Ukraine).
The benefits of a stronger dollar include a moderating influence on inflation here at home (most commodities are priced in dollars; as the dollar goes up in value, they should go down in price for the U.S. consumer) and greater purchasing power for U.S. companies and consumers abroad (today, it costs 99c to “purchase” one Euro; in 2008, it cost $1.57). The drawbacks of a stronger dollar include a reduction in ex-U.S. earnings for U.S. multi-national corporations (overseas profits are worth less as they are converted into dollars) and greater financial stress for most nations in general as a stronger U.S. dollar pushes up their import prices and for those nations in particular that have borrowed in U.S. dollars (as it becomes harder to make interest and principal payments as the dollar rises in value and their currency falls in value). Finally, at a very macro level, the strength of our currency reflects, I think, an economic, military, and energy profile that, collectively, is the envy of the world.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 1561-BCI-8/29/2022