The US dollar is still the global reserve currency. And over the course of the last few weeks, its value has fluctuated by just under 9% and over the course of the last 12 months, the swing has been much greater.
If you plan to vacation in the US this summer, then this fluctuation will have an immediate impact as prices of everything in the US will appear much more expensive in euro terms. The cost of hiring a car, the cost of staying at a hotel, eating out and buying the odd few bits of clothing will be more expensive.
However, even if you have no plans to take a trip state-side, the fluctuating value of the dollar will have an immediate impact on your financial situation, here’s why.
In the investing world, a significant weighting in the make-up of investments, be they equities or bonds are done in US dollars.
So, even if one purchases a particular investment or range of investments, be they included in mutual funds, ETF’s, bonds and so on, chances are they will be heavily weighted in asset classes that are ultimately priced in US dollars.
Over the course of the last number of weeks, watching the value of investment funds rise and fall, the variations are almost universally tied to the swings in the value of the US dollar. Sure, the value of the underlying assets have risen and fallen but it is the US dollar that most closely matches the swing in value.
Today, more than ever, investors need to focus on their investing strategy as opposed to tactics. If they are true believers in the concept of time as a key ingredient of sound investing, then they must begin to develop a very tough skin when it comes to daily and even weekly fund valuations. Otherwise, they risk becoming investment tacticians which can cost them dearly as emotion can trump reason and short-term concerns out-weigh long-term performance.
Over the course of the next few months, a lot of major global events will unfold which have the potential to significantly disrupt fund valuations. Greece is an obvious example but so too is the decision of the US Fed. to increase interest rates. Also, on the margins is the unfolding UK in-out narrative on EU membership, while this is slated to be put to a UK-wide referendum in 2017, the developing narrative will be closely watched and reacted to across the world.
Protecting and growing personal wealth is never easy. But remaining informed along with having a sound strategy that is aligned to one’s long-term, personal financial needs are key ingredients to success.
Frank Conway is a qualified financial advisor and author of Cents & Sensibility – a financial guide for young adults. He also founder of MoneyWhizz.org, a financial literacy initiative available across second level schools.