Source: deVere Group
An unexpectedly strong dollar is prompting investors around the world to adjust their portfolios as the US economy remains robust, and inflation remains sticky, meaning the Federal Reserve’s interest rate cuts are likely to be pushed back.
“Initial predictions of a weakening US dollar for 2024 have not materialized, and the greenback’s strength has caught investors off guard, prompting widespread portfolio adjustments globally,” comments Nigel Green, the CEO of deVere Group, one of the world’s largest independent financial advisory and asset management organisations.
The resurgence of the dollar is attributed to several key factors.
“The US economy has defied expectations with its robust performance. This economic strength has bolstered confidence in the dollar, attracting inflows of capital from investors seeking exposure to a thriving economy,” notes the deVere Group CEO.
“The Fed has been cautious in its approach to monetary policy, opting to hold off on cutting interest rates. This stance has supported bond yields and added to the attractiveness of US assets, further bolstering the dollar’s appeal.”
He continues: “The International Monetary Fund’s prediction that US output will outpace its Group-of-Seven peers by a significant margin is also fuelling talk of US exceptionalism.
“This narrative underscores the perception of the US as a standout performer among advanced economies, supporting stocks and bond yields and strengthening the dollar’s position.
“In addition, in a time of mounting geopolitical tensions and uncertainty, the US dollar remains the ultimate safe haven currency.”
Given the unexpected strength of the dollar, and “with no sign of the momentum cooling”, investors are re-evaluating their portfolio allocations to tackle the shifting market dynamics effectively.
“Those heavily invested in non-dollar-denominated assets may face challenges as the dollar strengthens. Consider hedging currency risk through derivatives or reallocating investments to sectors less sensitive to currency movements,” says Nigel Green.
“Industries with a strong domestic focus, such as utilities, healthcare, and consumer staples, are likely to benefit from a stronger dollar. Conversely, sectors with significant international exposure, such as industrials, could face headwinds from currency translation effects.”
A stronger dollar is going to attract foreign investors seeking higher yields on US fixed income securities. As demand for US bonds increases, bond prices rise, and yields fall. “This inverse relationship between bond prices and yields means that investors could experience lower returns on their fixed income holdings in a strong dollar environment.”
While the dollar may be strengthening, opportunities still exist in international markets.
“Investors should consider selectively investing in regions with attractive growth prospects or undervalued assets. Diversifying globally can help mitigate concentration risk and enhance portfolio resilience.”
The deVere CEO concludes: “We expect the US dollar to continue its surprising strength throughout 2024 and extend its current momentum into 2025.
“When the environment changes, so, maybe, should your investment mix.”
deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients. It has a network of offices around the world, over 80,000 clients and $12bn under advisement.
