Key takeaways
The U.S. dollar is demonstrating renewed strength against most foreign currencies.
The trend emerged post-election in apparent response to the possibility that the Trump administration may pursue protectionist trade policies once in office.
A stronger dollar dampens net returns on overseas investments.
The dollar gained strength against foreign currencies in recent weeks. The dollar is inching closer to euro parity (where one dollar equals one euro), a point last reached in November 2022. Since early 2021, the dollar has generally trended stronger.1 For example, in late September, the dollar was valued at approximately $1.12 to the euro, Europe’s common currency. By the end of November, the dollar strengthened, and the exchange rate was near $1.05 to one euro.
While the dollar’s rally began prior to November's election, the trend continued after Donald Trump won a second presidential term. Trump regularly campaigned on the theme of implementing more severe tariffs on key trading partners, and shortly after the election, laid out specific tariff proposals that would affect China, Mexico and Canada. Because tariffs tend to be inflation, investors naturally wonder if they could slowdown anticipated interest rate cuts from the Federal Reserve (Fed).
“Relative currency values reflect the global flow of funds,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “When the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around.”
“The fundamental factor contributing to currency trends is central bank interest rate policy,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “Earlier in the year, the European Central Bank initiated interest rate cuts, while the Fed delayed cuts.” With markets anticipating the onset of Fed rate cuts, the dollar weakened against the euro. By September, the Fed began cutting rates. But Haworth says markets have since scaled back expectations about the pace of the coming year’s Fed rate cuts. Since the election, markets appear to be reacting to speculation about potential tariff impacts on central bank interest rate policy.
Year-to-date, the dollar has gained just under 5% in value versus the euro.1 As indicated in the chart below, year-to-year changes in dollar-to-euro values have been more muted in recent times compared to the prior decade.
In mid-2024, the Bank of Japan (BOJ), for the first time in 17 years, raised interest rates. This helped strengthen the yen. In the chart below, the declining trend indicates the yen’s increasing value versus the dollar.1
“Relative currency values reflect the global flow of funds,” says Haworth. “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, but that reversed course in early 2024 as European-based central banks cut interest rates. The nominal broad dollar index, a measure of the dollar’s strength against a basket of global currencies, trended higher, particularly in 2024’s closing months.1
A positive feature of a stronger dollar is the lower cost of imported products from other countries. For example, if a car made in Germany is valued at €50,000 and then is imported to the U.S. when the dollar stands at $1.20 to €1, the retail price of the car in the U.S. would (theoretically) be $60,000 (20% more than its European price to reflect the currency exchange rate). If the dollar strengthened and was valued at $0.90 to €1, the car’s value in the U.S., using the same assumptions, would decline to $45,000, a significant savings for a U.S. consumer.
However, a strong dollar can also detract from revenues generated by multinational companies based in the U.S. The net income earned from foreign sales will decrease once exchanged into dollars. A stronger dollar means U.S. companies that export products abroad will be less competitive because of the product’s elevated price when translated into euros or another currency, which can lead to lower sales as foreign buyers shift to lower cost alternatives.
Haworth says the impact of currency movements shouldn’t be a major consideration for investors as they assess the value of specific stocks. The same is not true, however, for U.S. investors who include overseas-based investments in their portfolios.
For example, consider the value of an investment in the MSCI European Union (EU) Index. Year-to-date through November 29, 2024, the index, in local currency terms, generated a return of 7.67%. However, the net return for a U.S.-based investor in the index, translated back into dollars, was just 2.66%, due to the dollar’s relative strength in 2024.3 By contrast, when the dollar weakens compared to the euro, it enhances a U.S. investor’s net return after calculating the currency exchange impact.
“Currencies are less volatile than stocks as a whole, and their direction is challenging to predict, given numerous factors that influence relative currency values,” says Haworth. “Equity investors, in particular, should be somewhat insensitive to short-term dollar trends when positioning long-term investment assets.”
While currency considerations may not play a decisive role in your investment strategy, the issue could be worth discussing with your wealth management professional, particularly if your portfolio includes overseas investments.
In 2023, the dollar declined modestly compared to the euro, Europe’s common currency. At the start of 2023, the dollar was at $1.07 to the euro, but fell to $1.1062 by year’s end. Over the course of 2024, the dollar recovered, requiring only $1.05 to exchange for one euro. It is notable that in August 2022, the dollar reached parity with the euro ($1 = 1 euro).1 As is always the case, investors can expect currency values will fluctuate over time.
While currency values fluctuate constantly, between 2008 and 2022, the general trend was toward a stronger dollar. As recently as 2008, $1.60 was required to purchase one euro. In August 2022, the dollar reached parity with the euro ($1 = 1 euro). For a brief time, it took less than $1 to purchase one euro. In later 2022, the dollar began giving up some ground, and by the end of 2023, the exchange rate was $1.1062 to the euro. The dollar regained some ground in 2024, and by the end of November stood at $1.05 to the euro.1 From a historical perspective, the dollar and euro remain fairly close to parity.
Currency valuations fluctuate constantly, driven by the flow of funds between markets. The two biggest drivers are central bank policies (interest rates set by the U.S. Federal Reserve and its counterparts in Europe, England, Japan and elsewhere); and economic growth relative to inflation. Those factors often dictate which way money flows. If attractive interest rates and economic conditions in the U.S. draw foreign investors, the dollar is more in demand and gains strength. If, by contrast, other countries offer more attractive interest rates and more favorable economic conditions, it will likely be reflected in their own currencies gaining strength and the dollar weakening.
After being inverted for much of the last two years, the yield curve is flattening across Treasury securities of varying maturities.
Investor gains continue in 2024 as the fourth quarter begins, with global stocks, bonds and several real asset categories delivering solid returns.
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