Picture du Jour: Plunging dollar erodes non-US investors’ returns

By Prieur du Plessis, on March 7th, 2008 posted in: Investment, Markets, Money

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With the US dollar falling down a precipice, spare a thought for non-US investors invested in US stocks and bonds.

The graph below shows the performance of the S&P 500 Index since the beginning of 2007 in both US dollar terms (red line) and euro terms (blue line). Whereas US investors are showing a very poor return of -8.03% for the period, euro investors are completely under water to the tune of -21.02%. For the year to date the figures are -11.78% (US dollar) and -15.50% (euro). (Although I am using the euro in this example, the same logic applies to most other non-US dollar currencies.)

Source: StockCharts.com

The next graph illustrates the same principle for bonds by comparing the performance of US 10-year Treasury Notes in US dollar terms (red line) with the same bonds from the viewpoint of a European investor (blue line). Whereas US investors have every reason to be relatively pleased with a return of +10.28%, euro investors are in the red by -5.28%. For the year to date the figures are +4.98% (US dollar) and +0.55% (euro).

Source: StockCharts.com

With the falling dollar the US is becoming like a candy store for foreign investors, but that does not mean that the focus will necessarily be on run-of- the-mill portfolio investments in US stocks and bonds as a case can be made that neither asset class offers particularly appealing value. As a matter of fact, any sell-off in the US markets could result in large-scale foreign liquidations. Capitalizing on the favorable exchange rate, foreign investments may for a while be directed more towards picking out the gems by means of corporate deals. That certainly seems to be the emphasis of the Sovereign Wealth Funds.

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2012 U.S. Dollar Outlook: How to Play A Short-Term Rally (Money Morning, 1/20/12)

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Read more on U.S. Dollar (USD), Bond Investing, Investors at Wikinvest

PostOnFire.com

March 7, 2008 at 2:22 pm

Plunging dollar erodes non-US investors’ returns…

With the US dollar falling down a precipice, spare a thought for non-US investors invested in US stocks and bonds. This post highlights some interesting graphs, comparing US dollar and euro returns….

Guy M. Lerner

March 7, 2008 at 3:31 pm

PdP: I mentioned failed signals and stocks in the last post and we can apply the same principle here to the Dollar. Over the last eight weeks the Dollar should have bounced; there were positive divergences between price and various oscillators and essentially, these are a good time to get long an asset. However, aside from the fundamental dynamics in the Dollar, closes below the positive divergence bars (which I can quantify) often lead to an acceleration of prices lower. I believe that is what we are seeing in the Dollar now at least from a technical perspective. The Dollar failed to bounce; this failure will lead to an acceleration of prices lower. This will keep pressure on stocks as hard assets continue to find favor.