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Any depreciation of a country’s currency makes its exports more competitive and foreign products less attractive to domestic consumers with their exports more competitively priced on world markets, large companies tend to benefit from domestic currency weakness. Ceteris paribus, increased (decreased) exports of goods and services generally lead to a currency appreciating (depreciating) against its major trading partners. When a Japanese company sells products internationally, the foreign exchange dollars must be converted to Yen for disbursement to employees, suppliers, bondholders, and shareholders.
#U s currency rates drivers
The key drivers of changes in exchange rates are trade flows, investment and portfolio flows, and the influence of safe haven currencies in times of crisis. Most currencies became free-floating by 1973, their value determined relative to one another in currency markets. President Nixon unilaterally ended the convertibility of dollars to gold in 1971 in an event referred to as the “Nixon Shock”. dollars at a fixed rate and central banks could convert dollars to gold. Under this system, all currencies were convertible to U.S. The Bretton Woods system of managed, or fixed, exchange rates was implemented in the aftermath of WWII. This paper aims to provide readers with an understanding of key drivers of currency fluctuations and the investment implications of currency fluctuations. As shown in Figure 1, before returns are translated to dollars, the MSCI EAFE index has shown lower volatility than the S&P 500 index and emerging markets stocks have the same volatility as the S&P 500 index but adding currency effects results in an entirely different picture.įigure 1: Currency Effects Drive Volatility in International Stocks Source: GMO Letter Q2-2018, MSCI, S&P Currency effects can have a large impact on the returns of international stocks for investors measuring their wealth in dollars. developed countries, returned 1.38% in local terms but -1.43% after conversion to U.S. The MSCI EAFE index, representing non-U.S. dollar relative to currencies of other developed nations and especially emerging markets. A key factor driving international asset returns in 2018 has been the strength of the U.S.