Key takeaways
The dollar enjoyed a modest boost against Europe’s common currency, the euro, and other foreign currencies in 2024’s first half.
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 supporting the dollar.
The dollar gained modestly against the euro and other overseas currencies in the first half of 2024, partly in response to higher interest rates in the United States. As indicated in the chart below, currency fluctuations have been more muted in recent times compared to the past decade.
“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 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 trying to discern what to expect in terms of interest rate policy between the Fed and its most notable overseas counterpart, the European Central Bank (ECB),” says Haworth. The ECB took the first policy-shifting step in early June, reducing its benchmark interest rate by 0.25%. However, the Fed continues to delay rate cuts despite its earlier projections that several 2024 rate cuts could occur.
With U.S. interest rates remaining higher, it could attract more foreign investment, which tends to inflate the dollar’s value. But Haworth says many factors can affect currency movements. “On the face of it, the Fed keeping rates higher for longer should boost the dollar,” says Haworth. “On the other hand, U.S. government deficit spending is on the rise. This means the U.S. Treasury must issue more debt, and an increasing supply may mean foreign investors become less attracted to owning U.S. Treasury debt.”
When the dollar gains ground against the euro, as it has to this point in 2024, 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.
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 intended to curb inflation. 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. Prior to that time, this last time parity occurred was in late 2002.
The Fed increased rates until July 2023. Yet the ECB continued hiking rates for a time, weakening the dollar compared to the euro over the course of 2023. 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 began a modest rally.1
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 by mid-June 2024 moved to more than 124, representing another dollar rally.2
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.
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,” says Haworth.
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 May 24, 2024, the index, in local currency terms, generated a return of 10.62%. However, the net return for a U.S.-based investor in the index, translated back into dollars, was just 6.59%.3 In other words, the stronger dollar resulted in a lower net return for a U.S investor in overseas markets. 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. “Equity investors, in particular, should be somewhat insensitive to short-term dollar trends when positioning long-term investment assets.”
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 might impact your investments and potentially influence how you choose to allocate assets within your portfolio in support of your investing strategy.
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. It recovered modestly in 2024’s opening months, dropping near $1.06 to the euro in April, though the dollar retreated modestly since then. It is notable that in August, 2022, the dollar reached parity with the euro ($1 = 1 euro).1 As is always the case, currency values can be expected to 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 early 2024.1 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 have more attractive interest rates and more favorable economic conditions, it will likely be reflected in their own currencies gaining strength and the dollar weakening.
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