The U.S. dollar has been on a bit of a rally since mid-April, a reversal following months of weakness. The U.S. Dollar Index (DXY), which compares the value of the dollar to a basket of international currencies, has returned to its December highs.
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The recent trend of a stronger currency, according to Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, will not hold up over the long run. The only reason the currency has been climbing for the past few weeks, according to Wren, is because the market got caught short following concerns that the growth of the global economy was slowing. Many investors respond to signs of economic weakness by moving their money into securities deemed to be safer than stocks, such as U.S. Treasury bonds.
Wren told FOX Business that, “For us, we think the dollar will likely end the year modestly lower than current levels.”
The strength of the U.S. dollar has significant implications to the global economy. As previously reported by FOX Business, the greenback is the most widely used currency in the world, with roughly 63% of all national foreign-exchange reserves in U.S. dollars. The vast majority of commodities deals, international transactions and other kinds of trades are in U.S. dollars. Many economies are pegged to the dollar and some countries have even adopted the U.S. dollar as their official currency. For these reasons, pretty much everyone keeps a close watch on the currency’s value.
For now, Well Fargo doesn’t think the relatively modest rise in the dollar will impact equities. “If it accelerates below euro 1.15 then stocks will probably start paying attention but equites are more concerned about what the Fed is going to do as a result of the rise in general inflation.”
They added that a slightly tighter-than-expected Fed is helping the dollar a bit.