Nov. 14, 2022

Fluctuating currency values often fly under the radar for most people. However, the recent appreciation in the U.S. dollar represents a rather strong move — one that will likely have more noticeable implications for investors in a number of areas, some positive, some negative.

How much has the dollar appreciated?

The value of the U.S. dollar has surged in 2022, hitting a 20-year high in late September.  Year to date, the dollar is up 13.7% (through Nov. 7) and 15.7% higher over the last year, according to the Federal Reserve’s Trade-weighted Dollar Index.

What is causing the recent spike in the dollar’s value?

The dollar’s surging value is largely due to higher interest rates in the U.S. relative to other developed economies. Large international investors are enticed to move money globally to where they can get the best risk-adjusted return, and the U.S. is currently an attractive choice for this segment. As such, these international investors need U.S. dollars to purchase U.S. securities – thus the need to convert their currency into dollars.

Case in point: The yield on the U.S. 10-year treasury is currently 4.2%. By comparison, 10-year government securities yield 2.3% in Germany, 2.8% in France, 3.5% in the U.K. and 0.3% in Japan.

Source: FactSet

What impact could a strong U.S. dollar have on investors?

A strong dollar comes with benefits and drawbacks. Consider the role our currency plays in the following areas:

Corporate sales and earnings

For investors, one of the most noticeable influences is the impact on corporate sales and earnings. When the dollar rises in value relative to other currencies, it can have a negative impact on the financial results of U.S. multinational corporations. Conversely, when the dollar declines, it can boost U.S. corporate results. At the end of every quarter, U.S.-based companies must convert their sales and earnings generated in foreign countries into U.S. dollars for financial reporting purposes. When the dollar is strong, foreign currencies convert into fewer dollars making sales and earnings look weaker.

International investment returns

According to Bloomberg, London’s main FTSE 100 Index is down 1% year-to-date (through Nov. 4) when measured in its local currency, the British pound. But with the British pound down 16% relative to the dollar this year, a U.S.-based investor would see a 16.4% decline after converting the returns into U.S. dollars, according to Bloomberg. This is partially the reason that our Global Asset Allocation Committee currently has an Overweight recommendation on U.S. equity markets.

Goods and services

From an economic perspective, the influence is largely mixed.  A strong dollar makes U.S.-produced goods and services more expensive for potential foreign customers, thus negatively impacting demand for U.S. exports. On the positive side, a stronger dollar makes foreign produced goods and services cheaper for U.S. consumers, thus helping to contain inflation.

International travel for U.S. consumers

The strong U.S. dollar makes it much less expensive for U.S. consumers to travel abroad as the greenback has grown in value against virtually all major foreign currencies. Versus the Euro, the dollar is 16% stronger over the last year, according to FactSet data.

Source: U.S. Commerce Department

As seen in the above chart, spending by foreign visitors to the U.S. exceeded that of U.S. consumer spending internationally from about 2009 through to the pandemic, according to the Commerce Department. After a sharp drop-off on both sides during the pandemic, U.S. consumer spending on international travel has far outstripped that of foreign spending here in the U.S.

Bottom line

Currency fluctuations can be a complicated issue, but investors should be aware of the various ways they can affect investment returns. Your Ameriprise financial advisor can help you understand the risks and opportunities associated with changing currency values on your portfolio.

Unless otherwise noted, all data is sourced from FactSet and Bloomberg as of Sept. 30, 2022. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.