That about sums up the situation for the U.S. dollar. Although the U.S. is dealing with enormous amounts of deficit spending and accumulated debt, it turns out that many of the developed European nations are even worse off! Greece has been most in the news lately, but the debt problem is much more widespread than that. In consequence, the U.S. dollar rallied massively yesterday against a basket of foreign currencies, especially the Euro.
Click to enlarge. Courtesy: Yahoo! Finance
As you can see from the chart, the dollar’s strength is a recent phenomenon. Just a year ago, the tables were turned and the dollar was in freefall. U.S. investors aren’t used to thinking about currency exchange rates, but movements in the dollar can have a significant effect on the returns of all kinds of asset classes and industry sectors, both foreign and domestic. Systematic use of relative strength in tactical asset allocation can help to adapt to changes in currency exchange rates.
