Typically, there would be a cool tie-in between today’s blog and event in history that occurred on today’s date like:
- 1970 Elvis Presley visits President Nixon at the White House
- 1967 The Graduate opens in NYC
- 1945 General Patton dies
- 1940 F Scott Fitzgerald dies
- 1940 Frank Zappa born
- 1891 First organized game of basketball played in Springfield, MA
But in this case, there is no cool date-related tie in. It is the first day of winter, so the days are getting longer here in the Northern Hemisphere, which is good, if you like daylight, but try as we might, we just couldn’t find a tie in to today’s blog topic, the dollar, and today’s date. We’ll try again tomorrow.
We believe the dollar will likely remain range bound or move modestly higher in 2017 versus the currencies of its major developed market trading partners (Japan, Eurozone, Canada, the U.K., Sweden, and Switzerland). This is often referred to as the U.S. Dollar Index (DXY). But there are several other key dollar indices that we monitor regularly. (Please look for more details regarding our views on the dollar in our upcoming Outlook 2017 publication.)
The DXY index is probably the most frequently cited dollar index, and that tracks the dollar versus the currencies of its major developed market trading partners as listed above. The Federal Reserve provides monthly, weekly, and in some cases daily, data on several other key dollar indices, the Broad index, the Major Trading Partners index, and the Other Important Trading Partners (OITP) index.
Details can be found here, and the weights of each country’s currency in the Broad, Major, and OITP indices can be found here. The weights of each of the currencies in the three indices are based on how much the U.S. imports and exports from the country in question, which is why they are called trade weighted indices. These import and export weights can be found via the link above.
The Broad index includes the currencies of 44 countries (19 of which use the euro) and tracks the value of the dollar versus virtually all the world’s tradable currencies. Year to date, among those 44 currencies, the dollar has appreciated the most (15%) versus the British pound, followed closely by the 12% gain versus the Mexican peso. The dollar has depreciated the most in 2016 versus the Brazilian real (34%) and the Russian ruble (33%).
The Major index tracks the DXY index pretty closely, but also includes the Australian dollar. This index tracks the dollar’s movement versus mainly the currencies of developed market economies. The OITP index tracks the movement of the U.S. dollar versus 19 currencies, most of which are emerging market (EM) currencies (South Korea, Singapore, and Israel are notable exceptions).
The nearby figure shows that in general, these three indices generally move together, although not always and not always at the same pace. So which one matters most? That depends.
For the U.S. economy, the Broad index probably matters the most as it reflects the impact of currency movements on our imports and exports. All else equal, a stronger dollar makes our imports less expensive and our exports more expensive. A weaker dollar has the opposite impact—it makes the goods we import more expensive and our exports cheaper to our foreign customers. But for each individual company and sector, the most important dollar index to track can vary widely. In general firms in the S&P 500 derive approximately 70% of sales domestically, so aside from input costs to their production chain, the dollar is not a major factor. But 30% of S&P 500 sales come from outside the U.S. Of that 30%, roughly one third is sales to EM countries with two thirds going to developed nations. The dollar index that best tracks that mix is also the Broad Index, which is roughly 60% developed economies’ currencies and 40% EM currencies. Year to date, the dollar is up roughly 5% versus that basket, with virtually all that gain coming since the U.S. presidential election on November 8, 2016. As we noted in our Outlook 2017: Executive Summary, currency movements are one of the biggest risks to our S&P 500 earnings forecast (mid-to-high single digits) for 2017.
 We expect mid-single-digit returns for the S&P 500 in 2017 consistent with historical mid-to-late economic cycle performance. We expect S&P 500 gains to be driven by: 1) a pickup in U.S. economic growth partially due to fiscal stimulus; 2) mid- to high-single-digit earnings gains as corporate America emerges from its year-long earnings recession; 3) an expansion in bank lending; and 4) a stable price-to-earnings ratio (PE) of 18 – 19.
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY Index does this by averaging the exchange rates between the US dollar and six major world currencies.
Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
This research material has been prepared by LPL Financial LLC.
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