Currency Impact Report
FX Impact: Dollar Drops, Investors Gain
August 03, 2012
The U.S. Federal Reserve's most recent meeting didn't deliver the quantitative easing measures the market was hoping for, but the Fed's reticence on the subject seemed to be enough to fuel hopes that another round of QE3 still looms ahead. Those expectations pressured the mighty U.S. dollar against most currencies around the world in the past week, our "FX Impact" report shows. IndexUniverse ETF Analyst Ugo Egbunike said a weaker dollar is beneficial to U.S. investors who are thinking about upping their risk exposure and tapping into international equities, but it's too soon to tell if the dollar will only go down from here.
Murphy: The market has been focused on whether the Federal Reserve will roll out more quantitative easing measures, but it seems the prevailing sentiment is that it will eventually. How does that play into the currency space?
Egbunike: It has a direct impact on currencies. This past week, the U.S. dollar fell against most of its currency counterparts on expectations for QE3. Getting that quantitative easing means returning to risk-on plays, which means demand for safe havens like the U.S. dollar will drop.
Murphy: When you invest in international equities, you want a weaker dollar for added returns, so QE3 would be good for U.S. investors who are exposed to foreign equities, right?
Egbunike: Yes. This week’s weakness in the dollar added returns to a U.S. investor’s portfolio relative to local investors.
Murphy: This is a reversal from the strengthening of the dollar we’ve seen pretty much for the past year. A strong dollar has hurt returns from international equity portfolios significantly. Are the tides turning?
Egbunike: I’d say this is a slight reversal, but it’s too soon to tell. There’s no trend in place at this point because there are too many uncertainties in the air. We don’t know if QE3 will materialize, we still have the troubled eurozone trying to figure things out. There are too many questions.
Murphy: What was the most relevant currency move for U.S. investors this past week?
Egbunike: The major currency impact was the Aussie dollar relative to the greenback. U.S investors with exposure to Australian equities came up ahead about 1 percent in the week compared with local investors, and all because of expectations for more QE3 ahead. By and large, the U.S. dollar weakened against most currencies like the New Zealand dollar, the Canadian dollar and the Mexican peso.
Murphy: Mexican equities have been delivering solid returns year-to-date despite the strength of the dollar up to now. How well did the peso do this past week and why?
Egbunike: This past week, a U.S. investor saw an added return of 0.96 percent on a Mexican equities portfolio vs. a local investor because the peso gained more than 1 percent on the dollar. What’s helping boost the peso is not only the talk of more QE3 from the Federal Reserve, but also better exports to the U.S. and strong GDP growth there.
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