“Relative currency values reflect the global flow of funds,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “When the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around.” In 2023, investors perceived that U.S. interest rates were near a peak while still rising in other countries. As a result, more money flowed out of the U.S. This led to a moderate decline in the dollar’s value versus the euro. 1
In 2024, the tide shifted, at least narrowly, in favor of a stronger dollar. “The dollar is very much driven by interest rates and Federal Reserve (Fed) monetary policy,” says Haworth. He points out that markets anticipated the Fed scaling back its benchmark federal funds target rate in early 2024, but that timeline has been delayed. “Currency markets are, in large part, focused on relative monetary policies of the Fed and other central banks,” says Haworth. “The European Central Bank (or ECB, the Fed’s European counterpart) appears set to begin cutting rates in June, in advance of any change in Fed policy,” says Haworth. If the ECB gets a jump on the Fed, it could boost the dollar.
When the dollar gains ground against the euro, as it has in 2024’s early months, goods and services become less expensive for Americans who travel overseas. But from an economic and investment standpoint, the impact is different. For example, a stronger dollar means U.S. goods may be more expensive to purchase overseas, and U.S. company profits from foreign sales will be worth less after converting local currencies to the dollar. Investors may want to consider the role of currency trends when positioning portfolios.