New Charles Schwab Investing Whitepaper: A Strong U.S. Dollar Changes Everything

Monday, November 24, 2014 6:00 am PST

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"That said, there are risks to consider. International bonds offer valuable diversification in an overall portfolio, and reducing holdings in these asset classes may mean giving up some of this benefit."

SAN FRANCISCO--(BUSINESS WIRE)--A new report released by the Schwab Center for Financial Research, a division of Charles Schwab & Co., Inc., examines the implications of a strengthening U.S. dollar, and suggests investors should consider reducing their exposure to international developed-country and emerging market bonds, as well as to commodities.

A Strong U.S. Dollar Changes Everything” is the latest whitepaper from Kathy A. Jones, vice president and fixed income strategist with the Schwab Center for Financial Research. The whitepaper analyzes the U.S. dollar’s recent strength in the context of the current global economy and makes a case for why the trend is likely to be sustained over the longer term. Jones says a rising U.S. dollar means that U.S. bonds are likely to outperform international bonds from developed countries and emerging markets, and commodities are expected to underperform.

“The U.S. dollar is near its highest levels since 2009, and has appreciated by more than seven percent since May,” says Jones. “We think this bullish trend is just starting and could last more than a year. That can have significant implications for an investment portfolio, so this is a good time for investors to review their fixed income and commodity allocations and consider making adjustments.”

Key points in the whitepaper include:

  • A key driver behind the U.S. dollar’s strength is the performance of the U.S. economy relative to other major economies around the globe. The International Monetary Fund (IMF) estimates that U.S. GDP will expand 3.1 percent in 2015 compared to estimated growth rates of 1.3 percent and 0.8 percent for the Eurozone and Japan, respectively. With stronger growth, U.S. interest rates are significantly higher than those in core European countries and Japan, making the dollar more attractive for investors to hold. Additional factors supporting the strong U.S. dollar are the declining U.S. current account deficit and the diverging trend between U.S. monetary policy and the policies of other central banks.
  • If the U.S. dollar continues to appreciate, the return on foreign bonds is likely to lag behind the return on U.S. bonds. This is especially true in the developed country bonds, where yields tend to be lower than in the U.S.
  • In addition, a strengthening U.S. dollar is likely to cause commodities to underperform as an asset class. Since most globally traded commodities are traded in U.S. dollars, a stronger dollar tends to send the prices of commodities lower, all else being equal.

“We think trimming exposure to foreign bonds and commodities to account for a rising dollar makes sense,” says Jones. “That said, there are risks to consider. International bonds offer valuable diversification in an overall portfolio, and reducing holdings in these asset classes may mean giving up some of this benefit.”

Jones notes that other factors investors should consider over the next twelve months include an unanticipated shift in the path of the U.S. dollar, a robust rebound in global growth, and a possible change in the Federal Reserve’s timeline for tightening monetary policy.

Investors interested in learning more about investing in a strong U.S. dollar environment can reach out to their Schwab financial consultant or to a Schwab bond specialist.

The full whitepaper, part of Schwab’s Investing Ideas series, is available here.

Schwab Investing Ideas offer analyses of key market trends and investing opportunities investors can act on now from the Schwab Center for Financial Research. More information, including other recently published insights, can be found on Schwab’s Investing Ideas page.

About Schwab

At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.

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Disclosures

Past performance is no guarantee of future results. Forecasts contained herein are for illustrative purposes, may be based upon proprietary research and are developed through analysis of historical public data.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions.

Indices are unmanaged; do not incur management fees, costs, or expenses; and cannot be invested in directly.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.

Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.

Investing in emerging markets may accentuate these risks.

© 2014 Charles Schwab & Co., Inc. Member SIPC.

(1114-7966)

Contact:

Charles Schwab
Erin Montgomery, 212-403-9271
Erin.Montgomery@schwab.com

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Kathy Jones, vice president and fixed income strategist for the Schwab Center for Financial Research (Photo: Business Wire)
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