Currency Risk and the U.S. Dollar

Davis, Joseph H.
March 2004
Journal of Financial Planning;Mar2004, Vol. 17 Issue 3, p48
Academic Journal
This article addresses several currency-related issues from an economist's perspective. Currency exchange rates are determined by the interaction of a variety of economic factors. In the short term, these rates can be extremely volatile and unpredictable due to speculative activity and occasional government intervention. For both U.S. and foreign investors, changes in the value of the dollar can raise or lower the total return on international investments. Among mutual funds, currency-related returns may differ considerably depending on a given fund's exposure to foreign economies, the manager's currency-hedging strategy, the severity of the dollar's rise or fall, and disparities in global economic conditions. Ultimately, even a portfolio made up of domestic funds can be affected by significant currency fluctuations when they affect business profitability and global economic performance. In 2004, consensus forecasts anticipate that the U.S. economy will continue to benefit from the weaker dollar through increased manufacturing exports, a reduction in deficit and higher import prices that will mitigate the remote possibility of price deflation. Furthermore, such predictions commonly overlook the U.S. dollar's special status as the international reserve currency. INSET: Executive Summary.


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