This is an excellent question from Steve that got me thinking.
“…what explains the intrinsically weak US$’s stellar performance against the £ and €? And should we be concerned going forward, even though of course in the short term it at least helps keep the Sterling value of our portfolio buoyant?”
Here’s my response:
“… thanks for the great question, it really got me thinking….
We could hypothesise all day long about the reasons for the greenback’s strength or weakness – there are so many market participants with different and competing objectives that it is impossible to know even if there is a handful of reasons. What we can say for sure is that the price rises because there are more buyers than sellers, which suggests the majority (by weight of money at least) are positive about the dollar than not, but not all for the same reason.
The sentiment behind those reasons might be horribly skewed – “don’t bet against the Fed” etc. – or might be as base as “the best of a bad bunch”. So maybe they are highly irrational? Either way the “crowd” says the dollar is worth having, for now at least.
We can talk ourselves round in circles like that though, and to what end?
The bigger thing that occurs to me is that all currencies are inherently “weak” given they are backed by little else than good faith.
I can understand that the currency backed by the world’s biggest, freest economy is always likely to be “strong”, relative others, and that will persist until it is not the biggest or freest. The next biggest economies are China (who knows what’s going on there), the EU (the EU doesn’t know what’s going on there) and Japan. None of those are remotely as free as the US economy – for good or ill.
Nonetheless, out of that alternative rogue’s gallery you’re backing the US six days out of seven, aren’t you?! It’s certainly the one I’d head to in times of crisis compared to all others, if we had to hold currency, which we don’t, other than for spending money, which has to be in our local currency, usually.
So, could currencies be a necessary evil? It is the medium of exchange now we have given up on barter and gold.
Crypto used to like to think of itself as a currency / medium of exchange but now seems to think of itself more as “digital gold”.
To me, that sounds like crypto market participants scrabbling for relevance. Is crypto a moody pre-teen unsure of its place in the world? Or perhaps just a financial plaything for multi-billionnaires to dupe the masses? Who knows? What has been interesting is the degree to which the rise and fall of crypto appears to be following the rise and fall of stock markets – there appears to be a correlation. It doesn’t smack as any sort of “store of value”, not to me at least.
So, from where I am sitting, the dollar is as better looking than any other currency.
And, in answer to your question, no we shouldn’t be worried – currency fluctuations are an inherent part of the investment mix for us. We could hedge them out, but it would cost, and I doubt very much any long-term benefit would ensue – my best guess is that the hedge would right and wrong in equal measure and so we would have paid something for nothing. Which isn’t a strategy I’m prepared to pursue regardless of how tempting the “optics” might appear.
Those are my thoughts at least….”