March 2011 U.S. Dollar

There is a daily tug-of-war between currencies issued by all the nations of the world which measures each one’s value relative to all the others.  We can monitor this contest by comparing one currency against another, determining, for example, what one of our dollars could purchase in Canadian dollars.  We can also measure one against an index, a basket if you will, of many currencies.  The latter method finds its most common expression when valuing the dollar against a basket which trades under variations of the symbol DXY.  It is currently calculated using the daily exchange rate of a mix of currencies as follows: 57.6% Euro, 13.6% Japanese Yen, 11.9% British Pound, 9.1% Canadian Dollar, 3.6% Swiss Franc, and 4.2% Swedish Krona.

After a grinding decline which lasted for years, our dollar experienced a rapid recovery in 2008 when concerns about global liquidity began to surface surrounding the collapse of Bear Stearns.  The trend reversed suddenly in late 2008, regained strength as Lehman fell apart, and climbed to slightly newer highs as the world banking system followed suit by March of 2009.  It then began a ragged but steady decline once more, again reversed quickly toward the end of that year as serious questions were raised concerning the stability, even viability, of the European currency.  With DXY so heavily weighted toward the Euro, it was no surprise to see our dollar soar in value relative to this index.  What does surprise is the fall since then despite no concrete resolution to the European dilemma.  Our currency is now hitting lows for the year.

This index is obviously volatile.  No doubt we will someday discover what underlies the current weakness, what is driving the Euro, Pound, even the Yen upward relative to our dollar.  We are setting our gauge for this indicator at 6, although there is still the possibility of a further decline.  Of particular interest to us is the Canadian currency which is now trading above par to the U.S. dollar.  Given other positive factors, it is possible our neighbors to the north could one day be viewed as North America’s Swiss equivalent.

The Dollar Index (DXY) comprises six of the currencies most traded against the U.S. dollar, which represent the majority of global volume. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index.