What's Happening to the US Dollar?

What’s happening to the U.S. dollar? 

(9/09)

You’ve likely been hearing the consistent message of a falling U.S. dollar over the past weeks and months.  There are various reasons for this decline, but the bottom line for you may be to consider diversification of your portfolio.

The fundamentals continue to look weak for the U.S. dollar (USD).  Historically low interest rates, a trillion-dollar deficit, rising unemployment, anemic economic growth and further perceived government spending are all headwinds for the USD.

As the global recovery gains traction, investors are selling the USD across the board and buying global equities and commodities.  The headline move over the past few weeks has been gold comfortably holding the $1,000/ounce level, which has taken most commodities higher, including oil.  The main concern about the U.S. economy is inflation.  A common inflationary hedge is to buy commodities, which can partially explain the run on gold.

The USD has recently become a funding currency.  With the U.S. base funding rate being 0-.25 basis points, investors are borrowing cheap U.S. dollars to fund investments elsewhere.  The Japanese yen previously played the role of funding currency, with an interest rate at 0% for the past several years.  The USD has now joined the yen in this regard.

The USD hit its yearly lows against the EUR in September and the USD weakened dramatically across the board against its major trading partners.  Expect this trend to continue until the underlying fundamentals change.  One might be wise to somehow diversify a USD portfolio with some foreign currency.

Steve Kim, MBA, JD

Foreign Exchange Advisors LLC (www.thefxadvisors.com)

For informational purposes only – consult your professional financial advisor before making and investment decision.