Market Update: The Rising US Dollar

Market Update: The Rising US Dollar

Market Update: The Rising US Dollar 150 150 Piers Bolger

This is the first of our monthly market updates. Each month, I’ll share one key data point that shows how we’re thinking about financial markets and what that means to you. This month, I’m focusing on the rising strength of the US dollar.

A strong economy and tariff policy is driving the dollar

The appreciation of the US dollar through 2018 was expected – US GDP has increased by 4% for the 2Q18, inflation has remained benign, we’ve seen strong jobs growth with only a moderate rise in wages, while monetary policy has remained accommodative. These have all contributed to strong corporate earnings in the US that have driven the S&P 500 up 14% in the last 12 months, while the MSCI World Index is up around 21% (in A$ terms).

This growth in the US economy has been driven by sound corporate and market policies, but there’s been a change in direction recently. The imposition of tariffs has accelerated the increase of the US dollar. As the chart shows, the US dollar has already moved nearly 9% higher against the Chinese Renminbi, as Chinese authorities look to counter US tariffs on imports of $500 billion worth of goods and services.  

How this impacts your portfolio

It is possible that the rise of the US dollar could dampen financial markets into 2019, as a tit-for-tat approach (on tariffs) has the ability to reduce overall corporate earnings and slow global growth.  The US Government has already responded to this risk by announcing subsidies of $12 billion for the agricultural sector, while other countries are also responding in kind. Overall, the policy approach taken by the US Administration is short sighted in nature, while being destabilising to financial markets.  We see no positive aspects to this policy.

So when it comes to positioning your portfolio, our advisors take into account the impact of currency. In particular, it may influence the recommendations they make about your investments in offshore markets. If your portfolio already has substantial investments in offshore markets, now may be an appropriate time to also review your currency exposures to better protect your portfolio from a further rise in the US dollar.

Piers Bolger is Chief Investment Officer at Viridian Advisory


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