Fickle Currencies

“If Trump wants a weaker dollar, he’ll get one.” That was the prevailing view on the dollar’s future back in January. U.S. President Donald Trump had signaled that a weaker dollar would not bother him. Add to that concerns about the Federal Reserve’s independence once he installed “his man” at the helm.

Sure enough, the U.S. dollar was weak against the euro. And that is how it has to be, because prices move first and the fitting headlines are written afterward.

Nine Months Later

A lot has happened in the world since then. One thing has not: the demise of the U.S. dollar. Today, another currency is being dragged through the mud: the euro. Back then, the United States was beyond saving. Today, Europe is supposedly doomed. Forgive the melodrama, but financial markets truly are manic-depressive. The middle ground is rarely where the action is.

Yes, the growth gap is widening, energy costs are a burden, France’s debt gives all of us reason to worry, and somewhere in Europe there always seems to be an ominous election around the corner (Viva España!). And once again, the same rule applies: first the euro falls (and the dollar rises), then come the headlines explaining why.

Diversification Makes Sense

It is important to keep a cool head and appreciate the benefits of investing across different economies and currencies. Smart investors gain access to a broader selection of outstanding companies and reduce their dependence on any single political system. They also diversify their portfolios. Correlations, meaning the degree to which individual stocks move in relation to one another, are lower than among stocks from a single country or economic region.

Interestingly, while the euro-dollar exchange rate attracts plenty of attention in any given year, it has changed remarkably little over the past 10 years. When making investment decisions, the quality of a company’s business model therefore remains the most important factor.