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Currencies, Credit, and Equities

November 1, 2022 | Commentary

  • An index of the U.S. dollar measured against a basket of key foreign currencies has appreciated almost 25% since the start of 2021. Three-quarters of that rise has happened this year.
  • A stronger dollar hurts U.S. exporters and reduces the value of profits earned abroad. In contrast, American consumer purchasing power for imported goods is enhanced. Measured U.S. inflation would be materially higher today if the dollar had been declining.
  • One of the reasons for dollar strength is the Fed’s policy of raising interest rates. Another is generally benign corporate credit spreads that suggest defaults will not be severe any time soon. The combination of these and other factors when compared to conditions abroad paints an attractive picture for foreign capital seeking return and safety.
  • The biggest challenges arising from a strong dollar fall mostly on nations in worse economic shape than the U.S. This and the basic currency translation partly explain the recent weak performance of international stock investments. U.S. investors should be aware that when the dollar cycle reverses those headwinds will turn into meaningful tailwinds for international stocks.

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