The value of investments and any income from them can fall and you may get back less than you invested.

The US is firing on all cylinders, so why the weak dollar?


Since late December 2016 the US dollar has been falling in value – why? Initially the fall was easy to explain. Donald Trump was elected president a month before the greenback’s peak and the market had got ridiculously carried away with hopes of tax cuts, inflation and interest rate hikes. The new year had a period of the Trump administration achieving more or less nothing and the dollar lost its sheen.

Since then, the dollar has continued to fall. But when you look at what has happened over this period, the bull case from the post-Trump euphoria has pretty much played out; after a slow start to 2017 we saw US growth pick up in the second half of the year and it looks like it will have annualised around 3%.

Meanwhile, despite an absence of any tax cuts for most of 2017, the Federal Reserve still managed to raise interest rates three times in a year for the first time in more than a decade. And then, finally, we did have a very substantial package of tax reforms at the end of 2017. In fact, this was probably the most significant package of tax reform in thirty years. Most people would intuitively assume that this would lead to a stronger dollar.

So why has the dollar fallen?

The main reason has very little to do with the US and everything to do with everywhere else. For much of the period since the financial crisis the US has been the only game in town for investors. Emerging markets, Asia, Europe and the UK all struggled. Emerging markets began to turn the tide in 2016, although China suffered a sharp slowdown, and in the UK Brexit caused a sharp devaluation in the pound. Then in 2017 there was a synchronous recovery in Europe, China reaped the benefits of its biggest combined monetary and fiscal stimulus on record, and the UK proved that whilst it might be down it is far from out.

Suddenly, the dollar was no longer the only game in town and investors had other options.

Where does this leave the dollar now?

We’re really looking for alignment of all the planets within our investment process before we want to take a very pronounced position. Those planets are not currently aligned. As contrarians we really like the fact that investors loathe the dollar. As value investors the fact that it offers the highest interest rates of the major currencies is also attractive.

Despite that, the dollar is not especially cheap by our favoured metric which takes into account its relative inflation rates compared with those of its trading partners. Furthermore, when a big liquid currency establishes a trend it becomes somewhat self-reinforcing because it draws in certain hedge fund strategies which, among other names, are known as trend-followers. That can continue to push currency pairs a long way.

Where does that leave sterling?

We have been positive on the pound for most of the past year. At various times the political news flow has been pretty uninspiring but as usual this has commanded less of investors’ attention than forecasters seemed to appreciate. What matters is that the economy performed reasonably well. The UK has been a laggard against Europe and the US, but no basket case. With the pound undervalued there was scope for recovery – we remain of that view. There is still some undervaluation and whilst enthusiasm for sterling has grown it has not reached the disconcerting levels of consensus currently behind the euro. For the rest of 2018 therefore we expect UK smaller companies to continue to perform very well. Hopefully those European holidays should be better value this year too.


By Guy Foster, Head of Research Guy leads Brewin Dolphin’s Research team ensuring that a rigorous and exhaustive investment process is employed. He also provides recommendations on tactical investment strategy to Brewin Dolphin’s investment managers and strategic recommendations to the group’s Asset Allocation Committee. Before joining Brewin Dolphin in 2006, Guy was an Investment Director at Hill Martin (Asset Management). Guy has a Masters in Finance from London Business School. He is also a CFA charterholder, holds the CISI Diploma, and is a member of the Society of Business Economists. Guy frequently discusses financial issues with the written and televised media as well as presenting to the staff and clients of Brewin Dolphin.


The value of investments can fall and you may get back less than you invested

If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.

Past performance is not a guide to future performance.

No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.

The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.

The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.


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