uploads///The Dollar Has Been Strengthening Since July

Why the US Dollar Could Strengthen Further

Russ Koesterich, CFA - Author

Apr. 22 2015, Updated 2:00 p.m. ET

While the first quarter largely played to script, there were a few surprises. Russ explains, noting three portfolio moves to consider as the second quarter kicks off.

While the first quarter largely played out as I expected, there were a few surprises, including the rapid appreciation of the dollar, another drop in rates and the strong performance from overseas markets. Given this, now may be a good time to review your portfolio positioning for 2015.

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Market Realist – The US dollar could strengthen further due to diverging monetary policies.

The graph above shows the dollar index since July 2014. The dollar index indicates the strength or weakness of the US dollar (UUP) relative to other major currencies. Since July 2014, the index has galloped from 79.8 to 97.9, which is a gain of 22.7%. The dollar has largely seen one-way traffic against most major currencies. This year, the index has already been up by 8.5%. However, the dollar has stabilized in the last month or so.

The Fed ended its bond buying program in October 2014. Other central banks are still in monetary easing mode, though, in a scramble to revive growth in their respective economies. This is particularly true in developed markets (EFA). The ECB (or European Central Bank) and the Bank of Japan are both pumping liquidity though QE (quantitative easing). China (FXI) was the latest economy to join the easing bandwagon. The People’s Bank of China (or PBOC) lowered the reserve requirement ratio for all banks by 100 basis points to 18.5%.

Meanwhile, the Fed could be the first major central bank to hike interest rates. This divergence in policies has led to a strengthening dollar.

The US economy is relatively robust, especially in comparison to the economies of Europe (EZU) and Japan (EWJ). This trend has led to an even stronger dollar, which is the main reason for the difference in central bank policies. While the Fed could delay its rate hike due to weak recent data, the dollar could strengthen further since Europe and Japan could be in easing mode for a while.


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