Long-term investors should look beyond stock market volatility
Market volatility can be unsettling, but history shows that prices have returned to less volatile patterns over time. That can be good news for long-term investors.
After falling more than 3% during the first quarter, the value of the U.S. dollar (as measured by the benchmark U.S. Dollar Index/DXY) has roared back since mid-April and by midyear was about 6% above its low point in February. The dollar’s decline at the start of the year was puzzling, given that interest rates moved sharply higher during the first two months of the year and they tend to move in tandem with the dollar.
However, when yields moved higher again in April, the dollar returned to the typical pattern and moved higher with them. The dollar’s outperformance also benefitted from the weaker-than-expected first-quarter economic performance in several developed economies.
The ECB’s recent move to rule out an interest rate hike through at least the summer of 2019 was a dovish surprise to the market and we believe it will weigh on the euro in the months ahead. The dollar’s recent appreciation is not surprising, given the rise in yields, and we think the dollar could hold those gains for the balance of the year.
The U.S. dollar may hold gains through the remainder of the year.
Emerging market currencies have been hit hard by the appreciation in the dollar and rising interest rates. Oil-importing emerging economies also were squeezed by the move higher in crude prices. This was another unusual occurrence, as the dollar and crude oil prices tend to move in opposite directions. Emerging market currencies could continue to feel the strain of higher U.S. yields, a stronger dollar and tighter global liquidity.
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Section 3 — U.S. dollar rally looks more durable
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