Monthly update: Currency comes into focus
Movements in international foreign exchange markets have been dominating the news, with the pound plunging in value against the US dollar last week. It later recovered, but its sharp fall shook markets.
The dramatic drop was due to the UK’s perceived lack of credibility among investors following the government’s new financial plans, as announced in its ‘mini-budget’. But that’s only part of the story.
The pound’s current weakness is in context, and contrast, to the US dollar’s strength. The dollar has been appreciating against other major currencies for most of this year, largely owing to the relative strength of America’s economy.
Lilian Chovin, Head of Asset Allocation at Coutts, says: “Another thing that’s helped the US dollar is that the US Federal Reserve is seen as more credible in terms of how it’s fighting inflation. It’s acted faster and more decisively than other central banks.
“We remain more constructive on the outlook for the US economy, which isn’t facing the same energy shock as Europe.”
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
Our portfolios partly reflect currency moves, but it’s less direct than equity or bond prices, and depends on the investment.
Fixed income investments – bonds and credit – are generally not subject to currency volatility. Equity investments, on the other hand, are usually made in the local currency of the stocks involved. So this year’s strong dollar is relatively good news for investors whose reference currency is sterling or the euro – the returns are worth more when translated into their ‘home’ currency. It’s more challenging for those invested in dollars though.
More broadly, we had already made changes to diversify our clients’ investments away from the UK, before the government’s mini-budget hit the country’s investment markets.
We diversified our bond holdings away from just UK government ‘gilts’ to a basket of bonds from the G7 countries. We also reduced our exposure to UK equities, taking profit from more domestically-exposed stocks.
Coutts Invest - the easy way to invest, set up an ISA or manage your pension