The U.S. dollar index posted its 11th straight week of gains against a basket of currencies, making it the longest winning streak since its free-float in 1973.
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Since mid-July, the U.S. greenback has been on a steady increase, which has continued through August and September, and may be headed higher in the coming weeks. The important factors that strongly influence this rise in the U.S. dollar are moves made by the European Central Bank (ECB) and the U.S. Federal Reserve.
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Contrasting the success of the U.S. dollar, the Euro is attempting to recover after hitting a 22-month low against the U.S. dollar of $1.2677 on September 26, 2014. The British pound sterling is also slowly making up for lost value following Scotland’s vote to reject independence, and the Japanese yen is slowly augmenting after recently slumping to a six-year low against the U.S. dollar.
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The European Central Bank Governing Council recently voted to lower the benchmark interest rate to 0.05%, as their final reduction. ECB President Mario Draghi also announced that the central bank would begin purchasing asset-backed securities and covered bonds, which led to strengthening of the U.S. dollar and weakening of the euro.
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Back on this side of the Atlantic, the Federal Reserve is finishing its quantitative-easing program and is anticipating when the first interest-rate hike might be coming. Although the Federal Open Market Committee (FOMC) members have suggested that the rate hikes will begin during the third quarter of 2015, the recent flow of better-than-expected economic data has generated discussion that the new target could be in spring 2015. This has created a rate discrepancy that, with any early hint of higher interest rates, will add strength to the U.S. dollar.
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Overall, actions by the European Central Bank and the Federal Reserve point to the likelihood of continued U.S. dollar strength and euro weakness. This could pose significant headwinds to dollar-sensitive sectors of the market, particularly companies that respond to commodity prices affected by the greenback, and multinationals doing much of their business overseas.
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The increase in value of the U.S. dollar has driven the prices of various commodities down due to their inverse relationship. Gold prices have witnessed its lowest value since January 2, 2014, and crude oil reached its lowest level value in over two years. With silver and copper following suit, export prospects for wheat and corn are also hurt as U.S. grains become more expensive for foreign trade.
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A strengthening dollar will likely generate significant moves in U.S. stocks and emerging markets, something we are mindful of as we manage our clients’ portfolios.
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Geopolitical risks and global conflicts remain on the front pages. As ISIS destabilizes Iraq and Syria, Russia stealthily invades Ukraine, internal strife engulfs North Africa, and Boko Haram wages nefarious attacks in Nigeria and beyond, the world seems to be and is a precarious place. There is clear danger to investments both domestically and abroad from this tumultuous environment. We believe one way to mitigate this risk is through active, effective and diligent management.
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The Financial Industry Regulatory Authority (FINRA) classifies risk into two categories, as both systematic and non-systematic. Systematic risk, also known as undiversifiable risk, relates to factors that affect the overall global market. It affects all companies and financial institutions regardless of the entities’ financial conditions, managements, or capital structures. Some examples can include: interest rate risk, inflation risk, liquidity risk, all well as currency risk and geopolitical risk. Non-systematic risk is company-specific or isolated to specific asset class, and can cover areas such as common business risk, management risk or credit risk. We are advocates of addressing both forms of risk at the individual client portfolio level through the development of macro strategies and the utilization of short-term tactical tools.
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Our focus on active management seeks favorable risk-adjusted returns in any market environment, generally employing sophisticated algorithms and models to capture gains and protect against losses in a wide variety of sectors, asset classes, and countries. You can see some of our hypothetical asset allocations by using our new, web-based asset allocation tool, ClearChoice.
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Today’s investment world demands new thinking and dynamic strategies to react to the changing market environment. Diversification is not enough anymore. We strive to achieve a holistic risk-management investment approach that is highly selective of asset classes and allocations and which utilizes numerous strategies and tactics that may not be traditional. For example, we’ll invest in significant cash positions. When appropriate, we may suggest investing in alternative managers (hedge funds/private equity) who have demonstrated an ability to take advantage of opportunities not generally exploited by the broader market but who may have less assets under management than their competitors.
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From information gathering, determining risk tolerance profiles, to creating customized solutions for our clients, we at Vitreous Partners are committed to transparency, integrity, and clarity in the investment process.
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We remain thankful for the trust and confidence our clients have shown in us, and we are committed to rewarding that trust by striving to achieve superior investment returns while maintaining the highest standards of service.
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All the best,
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Rob Santos CEO, Vitreous Partners
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