Rising Dollar, Rising Markets?

What does a strong dollar mean for the rest of the world?

Source: Digital Juice

Over the past six months the trade-weighted dollar has risen 25%. A strengthening labor market here, monetary stimulus by the Bank of Japan, Q€ in Europe, falling oil prices in Canada, and a slowdown in China have depressed those currencies relative to ours.

A strong dollar has lifted the prospects of both Europe and Japan. Those export-oriented economies can expect higher profit margins, more competitive pricing, or both, as both their fixed and variable costs of production have fallen relative to the US. The strong dollar has supported a strong start to both the European and Japanese stock markets.

Global Market Update - DXY Exchange RateSource: Bloomberg

But a rising greenback doesn’t lift all boats. Many emerging economies will be hurt. They have dollar-denominated debt that is now more expensive. Lower commodity prices have also disrupted resource-based economies. Brazil and South Africa have been especially hard hit. Asia and Eastern Europe, on the other hand, seem more resilient. Many countries in these regions have been reforming restrictive labor laws and are now more competitive. Their growth may be slowing, but is still positive.

The fortunes of emerging economies are diverging. They are no longer a monolithic BRIC wall. A rising dollar is lowering the tide around the world. We’ll soon find out who’s been skinny-dipping.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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