In this episode of “Investment Management Foundations,” Wealth Enhancement Senior Portfolio Manager Ayako Yoshioka discusses the significance of the U.S. dollar as the world's leading reserve currency.
VIDEO TRANSCRIPT BELOW
Hello, and welcome to another segment of “Investment Management Foundations.” My name is Aya Yoshioka, and I'm a Senior Portfolio Manager here at Wealth Enhancement. Today's topic is the U.S. dollar. Yes, the greenback itself. On a day-to-day basis, we think of the U.S. dollar as cash, but in the investment landscape, the U.S. dollar and its impact as a currency is pretty significant. The U.S. dollar has served as the world's leading reserve currency since World War II, and today, the U.S. dollar represents 58% of the value of foreign reserve holdings worldwide, followed by the Euro, which is at 20%.
So, what is a reserve currency? And why does it matter? Well, sovereign entities conduct critical transactions to settle payments for imports and exports and currencies play a critical role in the value of commodities and the overall interactions between countries. The U.S. dollar has been the dominant reserve currency due to its liquidity and the trust in the robust financial system that we have here in the United States, which is why the U.S. dollar is involved on one side of over 85% of foreign exchange transactions.
So, what impacts the value of the U.S. dollar? First and foremost, the value is impacted by what you are comparing the U.S. dollar to. In the chart that you see on the screen, the U.S. dollar is compared to a basket of foreign currencies, and its strength or weakness as the line goes up or down, is a reflection of the strength of the U.S. economy, as well as our monetary policy relative to other countries.
As an investor in non-U.S. stocks or bonds, the strength or weakness of the U.S. dollar can play a role in the performance of your portfolio. When the U.S. dollar is strong, it's great to be a U.S. tourist in a foreign country, because your dollar will go a bit longer when you look to purchase goods or services in that local currency. However, as an investor in foreign companies, those earnings that are generated abroad are in a weaker foreign currency, and that converts back to fewer U.S. dollars.
With that said, timing a portfolio based on currency fluctuations is not the focus and the goal today. However, we hope that we've highlighted the role that the U.S. dollar plays when you're thinking about your allocation to non-U.S. investments. Thank you again for joining me today, and please tune in for another episode of “Investment Management Foundations.”
This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances. Investing involves risk, including possible loss of principal.
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