Key takeaways

  • The dollar gained against Europe’s common currency, the euro, and other foreign currencies in 2024’s opening months.

  • When the dollar strengthens against other currencies, it means more capital is flowing into the U.S. than the other way around.

  • Higher interest rates for longer in the U.S. is likely providing the dollar with a boost.

Persistently higher U.S. interest rates, a key theme during 2024’s early months, helped strengthen the dollar against major foreign currencies. Through mid-April, the dollar is up 3.4% against the euro, Europe’s common currency. It costs less than $1.07 to convert to one euro. By comparison, at the end of 2023, it cost more than $1.10 to convert to one euro.

Chart depicts annual change in the dollar’s value compared to the euro, 2014 - April 12, 2024.
Calculated based on data from the Board of Governors of the Federal Reserve System. *Through April 12, 2024.

“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.” The dollar’s solid performance at 2024’s outset stands in contrast to last year. In 2023, as interest rates appeared to peak in the U.S. but were still rising in other countries, more money flowed out of the U.S. This led to a moderate decline in the dollar’s value versus the euro.1

The tide may have shifted, at least temporarily, 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 appears to be 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) is on a path to potentially begin cutting rates in June.” If the ECB starts cutting rates before the Fed, it could further strengthen 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.


Dollar’s recovery to parity with the euro

As recently as 2008, it took nearly $1.60 to purchase the equivalent of one euro. The dollar has gained significant strength since that time.1 But as is often the case with currency markets, the gradual improvement occurred with a great deal of fluctuation along the way.

“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.”

Starting in early 2022, the Fed embarked on a series of significant interest rate hikes. Yields rose in the bond market as a result. More attractive real yields (government bond yields less the rate of local inflation) tended to draw more foreign investment, improving the demand for dollars and driving its value higher. In the summer of 2022, the dollar reached parity with the euro ($1 = one euro). For a brief time, less than $1 was required to purchase one euro.

In 2023, the Fed slowed the pace of interest rate increases, and in July 2023, implemented what appears to be its final rate hike for the current cycle. At the same time, ECB implemented more dramatic rate hikes. As a result, the dollar weakened against the Euro. “The euro and other currencies became relatively cheap in 2022, which started to attract capital flows,” says Haworth. By July 2023, it cost more than $1.12 to obtain one euro, compared to approximately $1.07 at the start of the year. However, over the course of 2023, dollar-to-euro valuations were generally in a trading range between $1.05 and $1.10, before a shift in early 2024, when the dollar sustained strength.1

Chart depicts the dollar-euro exchange rate: 1/1/2021 - 4/12/2024.
Source: FactSet and U.S. Bank Asset Management Group as of April 12, 2024.

Dollar versus other currencies

Trends occurring in the dollar’s relationship to the euro have generally tracked with other currencies as well. One measure of this is the Nominal Broad U.S. Dollar Index. It measures the dollar’s value to a basket of other global currencies, based on their relative importance to U.S. import and export activity.

In late September 2022, the index reached a recent all-time high of 128.32, reflecting significant U.S. dollar strength versus other currencies across the globe. This represented a major jump from the end of 2021, when the index value was 115.40 (signaling a weaker dollar). The index dropped to less than 118 as recently as July 2023 before reaching a 2023 peak of more than 124.00 in late October 2023. The dollar, as measured in the index, again fell below 120 in December 2023 but is now back above that level.2

Nominal Broad U.S. Dollar Index 01/01/2021 - 04/12/2024. This index, created by the Federal Reserve, measures the U.S. dollar’s value to a basket of other global currencies, based on their relative importance to U.S. import and export activity.
Source: FactSet and U.S. Bank Asset Management Group. As of April 12, 2024.

It should be noted that currencies fluctuate constantly. Changes are typically minor on a day-to-day basis, but trends may develop with potentially significant implications over time.


Economic impact of currency fluctuations

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 were to appreciate to $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 the price of the product translated into euros or another currency is higher, which can lead to lower sales as foreign buyers shift to lower cost alternatives. The impact on the bottom line for companies trading overseas may be limited, however. “They have tools to adjust currency risk, such as locating production facilities in countries where they do business, or using currency hedging strategies to offset any unfavorable currency movements.”


Investment implications of dollar trends

Corporate earnings can be affected by currency trends. Yet 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 April 17, 2024, the index, in local currency terms, generated a return of 6.96%. However, the net return for a U.S.-based investor in the index, translated back into dollars, was just 2.60%. In other words, the stronger dollar resulted in a lower net return for a U.S investor in overseas markets.3 By contrast, when the dollar weakens compared to the euro, it enhances the net return for U.S. investors after the currency exchange.

“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. He cautions investors not to base “buy-and-sell” decisions solely on the direction of currency trends.


Future value of the dollar

Haworth says it’s not only relative interest rate policies that may give the dollar an edge in the short term. “The U.S. economy is stronger today than those of most developed countries across the globe. This can also influence currency markets and boost the dollar.” He also notes that the decline in the number of foreign buyers of U.S. Treasury securities may mean dollar fluctuations have less impact on Treasury market activity. “If we assume a growing percentage of Treasury investors are U.S. based, currency valuations become less of an issue,” says Haworth.

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. It can be beneficial to account for the ways currency trends could impact your investments and potentially influence how you choose to allocate assets within in your portfolio in support of your investing strategy.

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  1. Based on data from the Board of Governors of the Federal Reserve System, retrieved from FRED, Federal Reserve Bank of St. Louis.

  2. Source: Federal Reserve Bank of St. Louis, “Nominal Broad U.S. Dollar Index,” April 12, 2024.

  3. Source: MSCI “End of day index data search,” as of April 17, 2024.

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