Feb 2018
12

Why Is The Dollar In a Free Fall Against the Euro and the Pound?

By Joe Day
February 12, 2018

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Every now and again, we get questions from clients that we think we should share. In this post, we respond to the question in the subject line: why is the dollar in a free fall against the euro and the pound?

To be sure, the US dollar is currently not in a “free-fall”. However, it is fair to ask what is behind last years drop in value of the US dollar relative to other currencies. First, currency fluctuations occur for many reasons. The dollar’s strength against the euro and the pound peaked (if you are looking at the 10yr chart) right around December of 2016. And yes, since that time period, we’ve seen a steady decline in the value of the dollar to the euro, pound and almost all other major currencies, as well.

There is no one reason why the dollar is “weaker” than these currencies, than it was prior to the end of 2016. It’s a combinations of inflation in the respective economies, differences in interest rates, trade policy, public debt, current account deficits and political stability and economic performance.

It’s important to remember that currency values can also change in the short-term based on confidence or sentiment alone. What this means, is a drop in the dollar in a short time period can be caused by political rhetoric about trade policy, or legislative agendas that may affect public debt. However, these are usually short-lived currency movements. The combination of the factors above will drive the long-term trend.

As an example too much public debt can lead to weaker dollar, protectionist trade policies can lead to a weaker dollar, high current account deficit (meaning you import more foreign goods than you export domestic goods) can lead to a weaker dollar, political uncertainty or instability can lead to a weaker dollar, and/or higher expected inflation in US economy can lead to a weaker dollar.

Again, its not just one thing that causes the movements. However, a weak dollar is not necessarily a bad thing either. A weaker currency can be helpful for US manufacturers exporting overseas. It can also be beneficial to US based investors with international holdings. To understand more how to think about a weak vs. strong dollar, see our previous blog post on the subject: http://bearmountaincapital.com/whats-not-in-a-word-strong-dollar/

This entry was posted on Monday, February 12th, 2018 at 02:39 pm and is filed under BlogEconomy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

 

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bio3Joe Day, CFA is the Founder of Bear Mountain Capital. Joe started the company after spending many years advising high net worth clients with a leading global wealth management firm. Joe earned the right to use the CFA designation from the CFA Institute in 2011. He also holds a degree in Business Administration, with a Major in Finance from Gonzaga University.

Luke Collova is an Investment Advisor Representative for Bear Mountain Capital focusing on planning, investment strategy, client development and operational support. Luke’s prior career included providing commercial insurance coverage for a global insurance firm. Luke maintains his Series 65 license and holds a degree in Business Administration, with an emphasis on Finance and International Business from the University of Puget Sound.