Dollar’s sudden rise puts a dent in value of foreign holdings
The once-struggling U.S. dollar suddenly is the strongman of the world’s major currencies. That’s great for Americans’ purchasing power -- but if you’ve noticed, it’s a heavy blow to the foreign stock holdings in your portfolio.
And because U.S. investors have pumped huge sums into foreign-stock mutual funds in recent years, this turnabout in the dollar may be much more painful for your nest egg than previous rallies in the currency.
The dollar had mostly fallen in value since the beginning of 2002, but by spring of this year it was showing signs of bottoming. The DXY index -- which measures the dollar’s value against six other major currencies -- reached its low for the year on April 22. Despite all the bad news since then about the U.S. economy and financial system, the dollar then treaded water until late July, when it began to surge.
Since July 21, the DXY index is up 6.5%.
The greenback has been very strong against the euro and the British pound. The euro slumped to $1.483 on Thursday, down from $1.592 on July 21 and the lowest since February.
There’s now a mad rush on Wall Street to get bullish on the dollar. Goldman Sachs & Co. joined the crowd Thursday, declaring in a note to clients that “The Dollar Has Bottomed!” (Yes, with the exclamation point.)
The dollar is rallying in part because global investors see prospects worsening for many economies outside the U.S., particularly in Europe. Also, the summer plunge in commodity prices is good for the buck because many investors had shoveled money into commodities in recent years as a hedge against a weak dollar. Now, some investors are selling commodities to move back into U.S. stocks and bonds.
But the dollar’s new muscle comes with a price: If you own foreign assets, they’re being depreciated -- the flip side of what happened to those assets when the dollar was falling.
Germany’s DAX index, for example, is up 0.4% since June 30 -- in euros. But translated into dollars the DAX is down 5.6%. The Australian market is down 4.5% in Aussie dollars but has plunged 13.1% when translated into U.S. dollars.
If you own a foreign stock mutual fund, the dollar’s surge explains a lot about why the fund has (most likely) performed so poorly this summer.
That alone isn’t a reason to sell a foreign fund. But this is a good time to take a closer look at your overseas holdings and whether you’re happy with the mix you have between foreign and domestic stocks.
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Money & Co.
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