Christopher Gannatti, associate director of research at WisdomTree, has written a note commenting that one of the most important macro stories of the last 15-months has been the dramatic decline in the US dollar.
He writes that this has helped spur international equity indexes that package foreign currency returns on top of the equity investments.
“When you look at historical factors that drive currency movements, interest rate differentials are important, and the recent environment has been one where the US Federal Reserve (Fed) has been hiking interest rates while the major developed market central banks in Europe and Japan have kept short-term rates in negative territory. This makes the collapse of the dollar all the more interesting and perhaps surprising,” Gannatti writes.
“The best explanation for what has been happening in our view is politically motivated uncertainty around whether US policy actions were going to favour a weaker dollar environment with less capital flows and investments into the US.
“The changing guard in the White house, with Gary Cohn out as Trump’s primary economic adviser and the insertion of Larry Kudlow may be ushering in a very important strategic change in the currency markets and sentiment.”
Gannatti cites the February CNBC story, authored by Larry Kudlow, Stephen Moore and Art Laffer, headlined ‘Trump needs a return to King Dollar’. The authors wrote: “There is still a missing pillar of prosperity in the Trump economic agenda, and that is a sound dollar strategy…the dollar weakened in 2017 and we want it stabilized.”
Gannatti comments that a change in tone from the White House economic team that welcomes a strong dollar environment could challenge investors in the international investing world.
“Now, the US economy does in fact remain the world’s largest consumer market, so a weakening dollar has created a short-term environment that has been more challenging for global multi-national companies that export into the US. Why? Well, a weaker dollar makes these imports into the US (exports from Europe, Japan and other regions) more expensive for US consumers.”
Gannatti concludes: “While we cannot say for sure what any currency will do, much less the dollar, before it happens, we do believe that the dollar’s movement—whether this downturn proves transitory or more long-lived—will have major implications for global asset allocation in investor portfolios. If Kudlow’s appointment triggers an inflection point, WisdomTree’s export-tilted strategies may become more interesting in short order.”