April 18 2007 - The Short View: Dollar weakness By John Authers, Investment Editor
The Short View: Dollar weakness By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: April 18 2007 18:19 | Last updated: April 18 2007 18:19
Dollar weakness has deep roots. It peaked against the euro in October 2000 and has fallen steadily since, dropping by 39 per cent. Such a weak dollar can skew perceptions far beyond the currency markets.
As Tony Tassell pointed out in this column last week, it makes the rest of the world look like a bonanza for Americans while the US looks terrible for European investors. Since the dollar’s 2000 peak, the MSCI World ex-USA index has gained 32 per cent in dollar terms. It has lost 19.2 per cent in euro terms. MSCI’s US index is up 7 per cent in dollars and down 35 per cent in euros.
There are elements of a virtuous (or vicious) circle.
Dollar weakness has spurred Americans’ new-found ardour for foreign stocks and it has deterred Europeans from investing in the US. Even in local currency terms, the return on Germany’s DAX index has been more than triple that of the S&P 500 so far this year.
The vicious circle can also be seen in the markets’ animal spirits. With the dollar falling below levels long regarded as floors for it, markets now need to find a new level. In this climate, the dollar does not get the benefit of the doubt.
Marc Chandler, currency strategist at Brown Brothers Harriman in New York, points out that this week’s falls have come despite strong US data on housing starts and manufacturing output, arguably the two areas of most concern for the US economy. “What could have easily been seen as positive news for the dollar was used as an excuse to sell, reflecting an importance of the negative sentiment,” he says.
But one side-effect that might have been expected has been notable by its absence. A strong currency is supposed to be bad news for exporters. But the strong euro and pound are yet to have any significant effect on large UK and eurozone stocks.
This is because companies can hedge out currency exposures better than they once could – both by using new financial instruments designed for the purpose and more practically by moving production facilities so that revenues and costs in different currencies are more closely matched. Exchange rate moves still matter but not in the way they did in the past.
john.authers@ft.com
Copyright The Financial Times Limited 2007
Published: April 18 2007 18:19 | Last updated: April 18 2007 18:19
Dollar weakness has deep roots. It peaked against the euro in October 2000 and has fallen steadily since, dropping by 39 per cent. Such a weak dollar can skew perceptions far beyond the currency markets.
As Tony Tassell pointed out in this column last week, it makes the rest of the world look like a bonanza for Americans while the US looks terrible for European investors. Since the dollar’s 2000 peak, the MSCI World ex-USA index has gained 32 per cent in dollar terms. It has lost 19.2 per cent in euro terms. MSCI’s US index is up 7 per cent in dollars and down 35 per cent in euros.
There are elements of a virtuous (or vicious) circle.
Dollar weakness has spurred Americans’ new-found ardour for foreign stocks and it has deterred Europeans from investing in the US. Even in local currency terms, the return on Germany’s DAX index has been more than triple that of the S&P 500 so far this year.
The vicious circle can also be seen in the markets’ animal spirits. With the dollar falling below levels long regarded as floors for it, markets now need to find a new level. In this climate, the dollar does not get the benefit of the doubt.
Marc Chandler, currency strategist at Brown Brothers Harriman in New York, points out that this week’s falls have come despite strong US data on housing starts and manufacturing output, arguably the two areas of most concern for the US economy. “What could have easily been seen as positive news for the dollar was used as an excuse to sell, reflecting an importance of the negative sentiment,” he says.
But one side-effect that might have been expected has been notable by its absence. A strong currency is supposed to be bad news for exporters. But the strong euro and pound are yet to have any significant effect on large UK and eurozone stocks.
This is because companies can hedge out currency exposures better than they once could – both by using new financial instruments designed for the purpose and more practically by moving production facilities so that revenues and costs in different currencies are more closely matched. Exchange rate moves still matter but not in the way they did in the past.
john.authers@ft.com
posted by Carlos T Mock at 9:31 AM
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