The USD is Going Up. Or is it?
The #usdollar index (#DXY) is up 11% YTD and the strongest in almost 20 years. Or is it? The reality is rather different. The DXY is simply a measure of the value of the U.S. dollar relative to a basket of six other currencies. The USD is therefore benchmarked against currencies whose countries are experiencing serious economic, political and financial disruption.
The #usdollar index (#DXY) is up 11% YTD and the strongest in almost 20 years. Or is it? The reality is rather different. The DXY is simply a measure of the value of the U.S. dollar relative to a basket of six other currencies. 83% of such a basket is composed of the #EUR (57%), the #JPY (13%) and the #GBP (12%). The USD is therefore benchmarked against currencies whose countries are experiencing serious economic, political and financial disruption. Hence the decline in value of those currencies vs the USD. DXY’s appreciation is clearly a function of the devaluation of those currencies rather than the intrinsic strength of US’ fundamentals.
As further evidence, just consider the Trade-Weighted Dollar Index (#DTWEXBGS) an alternative measure of USD value. The DTWEXBGS is composed of 26 currencies weighted on the relative trade of those countries with the US. If this index is considered, the USD is only up 6% YTD, almost half of the DXY. More poignantly, if a basket of #commodities, the #CRBindex, is used as a benchmark, the greenback is 19% negative, a rather dramatic YTD performance (see chart).
If we compare the USD vs. a basket of commonly used goods and services in the US itself, a.k.a the consumer price index, the dollar has lost YTD 5.3% of its value and 9.1% over the last 12 months. Not precisely a sign of strength. The learning here is that when it comes to investing, context is key. In this case the USD is not really “strong” (or “weak”) in absolute terms but rather relative to the other asset against which the instrument is valued. There is no question the USD is at the moment looking better than the Euro, the Yen or the GBP, yet, if real and scarce goods and services are used as a benchmark, a case can be made that the prospects of the greenback as a store of value look very dubious.
We entered an age where following headlines becomes very dangerous. Investors seeking to protect and increase their wealth over the longer term need to be able to critically sift through opposing narratives. Asset allocation decisions should be made by factoring in liquidity, volatility and sovereign risk through the unique needs of the investors in terms of risk and time horizon. Disclosure: Hold all assets mentioned. Not investment advice. Do your own research.
