In recent months, the rising dollar has become a key theme in financial markets. Currency movements have always been complicated both in their causes and consequences.
The U.S. dollar, measured against the Euro, has reached 12-year highs of late, rising more than 19% over the past year. The dollar’s rise, while not extraordinary, is certainly significant. A number of factors have likely contributed to the dollar’s ascent.
– The U.S. is currently displaying the good growth momentum. Following a 4.6% real GDP surge in the second quarter, the U.S. appears to have grown by a healthy 3% in the third quarter.
– Second, the US Federal Reserve looks set to increase interest rates in mid-2015, unlike either the European Central Bank or the Bank of Japan. All other things being equal, investors like to hold their assets in whatever currency pays the highest short-term rates.
With the dollar marching closer to an eight-year high, the impact of a solid greenback has started to worry traders and economists. The most obvious effect, so far, is a negative impact on international investment returns. The Bank for International Settlements, referred to as the central bankers’ bank, warned in its quarterly review that the strengthening dollar could “have a profound impact on the global economy,” and particularly on emerging markets.
While the appreciating dollar might be attractive for Americans travelling overseas, it seriously affects other parts of the world economy, and in particular countries and companies that have taken out loans in dollars.
In this regard, emerging markets could be facing a major setback, as they pay back and service debt they have in U.S. Dollar. Since the financial crisis, international banks have continued to increase their cross-border loans to emerging-market countries, amounting to $3.1 trillion. Most of this debt is in U.S. dollars.
Outstanding loans to China alone have more than doubled to $1.1 trillion since 2012, making the country the seventh largest borrower world-wide and sensitive to large swings in foreign currencies. Additionally, Chinese individuals have borrowed more than $360 billion through international debt securities.
As the surge in US dollar continues and its impact on other currencies unfurls, many investors are wondering what it means for their portfolio and how to adjust their strategies.Talk to Dino Zavagnoor a member of his team at Gladstone Morgan to analyze the options available to suit your individual needs and position your portfolio to reap benefits from a strong dollar.info@gladstonemorgan.com
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