U.S. stocks haven't been the only beneficiary of signs the U.S. economy is recovering, albeit slowly. The U.S. dollar has rallied recently, too. It's no wonder, then, that I'm getting lots of questions from investors about the outlook for the greenback going forward, and how this could impact other investments like commodities.
In the latest of my ongoing series of posts dedicated to questions I receive, I've compiled some of these currency and commodity-related queries along with my answers. You can check out earlier installments here.
Q: What currencies do you think will change in value (increase relative to the U.S. dollar) in the near future and why?
A: I actually expect an even stronger dollar in the coming months. While most central banks are still firmly in an easing mode, the Federal Reserve is likely to be the first major central bank to remove monetary accommodation. Though the end of Fed easy money will likely happen slowly and not until later this year at the earliest, it should help strengthen the dollar further relative to most other currencies (with the exception of the Chinese yuan, which is pegged to the dollar).
Q: What are the implications of a stronger dollar on commodities?
A: Commodities have generally done poorly this year. One reason: A strong dollar has been a bit of a headwind for commodities, which are priced in dollars. Looking forward, a stronger dollar should continue to keep some sort of ceiling on commodity prices. To be sure, however, there are other reasons why commodities have done poorly recently. For instance, equities' strong performance may be luring some investors out of poorly performing commodities into stocks. In addition, concerns about rising rates have also likely hurt the asset class.
Q: Do you still favor physical real estate and broad exposure to commodity-producing countries as tools to combat rising inflation?
A: As I mentioned in a recent post, I'm not worried about inflation in the near term. That said, yes, I still like both inflation hedge options. But between the two, I currently prefer bricks-and-mortar real estate exposure. Real estate prices are still relatively low and, unlike commodities, real estate can provide income.
Source: BlackRock, Bloomberg.