INVESTMENT UPDATE

Chart of the Month - US Dollar Index

  • 17 January 2021
  • 5 mins reading time

US Dollar Index

Data shown: the US Dollar Index over the past five years.

Source: Bloomberg/ Schroders Personal Wealth, 13 January 2021

The US Dollar Index provides an indication of the value of the dollar relative to a broad range of other currencies. A rise in the value of the dollar can be caused by a number of factors including greater economic prospects for the US economy (such as we saw in 2016) or an increase in demand for perceived “haven” assets during times of turbulence (hence the sharp rise in the Index in 2020).

We’re not out of the woods yet, but the focus has moved from economic contraction to financial stimulus from governments and central banks, vaccine distribution and the prospects of economic recovery later in 2021. Investors have been selling dollars and buying stocks, which is why the S&P 500 stock index has been hitting record highs from late 2020 onwards.

The value of the dollar is also being kept lower by the low interest rates and quantitative easing programme being implemented by the Federal Reserve (“Fed” US equivalent of the Bank of England). Low interest rates keep the return on holding dollars low, while quantitative easing increases the supply of dollars, which also contributes to a lower exchange rate.

The consequences of a lower value to the dollar are generally positive in the current environment. They make dollar-denominated debt obligations less expensive to pay off, while also making cash more readily available to US businesses. These factors would normally push inflation up, but the Fed has indicated that it is happy for inflation rates to rise above the target level of around 2% a year while the economy recovers and huge debt obligations are brought under control.

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Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.

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