Falling Dollar Erodes Non-U.S. Investors’ Returns

With the US dollar falling down a precipice, spare a thought for non-US investors invested in US stocks and bonds.

The graph below shows the performance of US 10-year Treasury Notes since the beginning of March in both US dollar terms (red line) and euro terms (blue line). Whereas US investors are showing a poor return of -2.8% for the period, European investors are completely under water to the tune of -17.5%. For the year to date the figures are -4.8% (US dollar) and -10.5% (euro). (Although I am using the euro in this example, the same logic applies to most other non-US dollar currencies.)

Source: StockCharts.com

The next graph illustrates the same principle for equities by comparing the performance of S&P 500 Index in US dollar terms (red line) with the same Index from the viewpoint of a euro investor (blue line). Whereas US investors have every reason to be very pleased with a return of +64.1%, euro investors are lagging quite far behind with +39.2%, which becomes more pronounced when compared to a return of 55.4% for the European Top 100 Index. For the year to date the figures are +22.9% (S&P 500 - US dollar), +15.6% (S&P 500 - euro) and +21.9% (European Top 100).

Source: StockCharts.com

It is understandable that European investors are not ecstatic about the greenback’s slide and will keep having reservations about committing funds to US assets until they see signs of the dollar forming a bottom.

Comments

[doubleguns]

When the dollar carry trade collapses they will have an opportunity and incentive to sell, sell, sell and make a very nice profit. Of course this will totally destroy the US stock market and our treasury bubble.

The roller coaster ride is still climbing the hill to the next drop.

This is going to be more frightening than the "Son of Beast" drop at Kings Island Cincinnati.

2009 Nov 18 07:52 AM

[Robert Jung]

Doubleguns is spot on. Connecting the dots, even the President is concerned - Major Garrett interview on Fox - Obama commented that the US Gov't borrowing and spending might be pushing the US into a double dip recession.

Go Bearcats.


On Nov 18 07:52 AM doubleguns wrote:

> When the dollar carry trade collapses they will have an opportunity
> and incentive to sell, sell, sell and make a very nice profit. Of
> course this will totally destroy the US stock market and our treasury
> bubble.
>
> The roller coaster ride is still climbing the hill to the next drop.
>
>
> This is going to be more frightening than the "Son of Beast" drop
> at Kings Island Cincinnati.

2009 Nov 18 09:44 AM

[Northern Dancer]

Mr. du Plessis your observation is the key to the entire global market situation. I've commented on this before, that in the eyes of offshore investors, the US markets have not done nearly as well as it appears domestically. In fact, since June, in terms of most foreign currencies, the S&P is pretty much flat. That's stunning. What it all means is that the rally since June really has been strictly a result of a falling dollar. That's not the kind of development that any form of real recovery in equity markets is based on. Instead, it's an ominous turn of events that portends real, real trouble ahead.

>It is understandable that European investors are not ecstatic about the greenback’s slide and will keep having reservations about committing funds to US assets until they see signs of the dollar forming a bottom.<

Isn't it ironic that your comment above makes perfect sense, but at the same time, it's become abundantly clear that any signs of the dollar forming a bottom will spell disaster in the US markets. European investors won't come streaming back into the US markets in that scenario either. If the dollar goes down further, foreign investors would lose. If the dollar rallies, they would lose. My contention for the past 4 or 5 months has been that we're not going to be seeing foreign money pouring into the US markets for a long, long time. And that's not any form of negative attitude on my part. It's just a sad fact that in the eyes of any foreign currency, investing in the US markets any time in the next year, at least, is bound to be a losing proposition.

.

2009 Nov 18 11:01 AM

[Old Trader]

"Also, the same is true for the price of gold. Europeans have not seen the rise that Americans have in the price of gold."

Of greater importance, from an economic standpoint, is price of oil.

2009 Nov 18 10:30 PM

[De Graaf]

I as a European investor have sold all of my dollar holdings in 2008 except for a few equities that are earning their revenue in foreign countries. So in nominal terms I get bang for my buck, but revalued against my Euro currency those assets will perform well.

Its just that their isn't any other way to invest in China etc. without the US markets. Think OTC pink sheets and ADR's to get an idea of what I mean.

The rest of my holdings are mostly held in Canadian Dollars. Much saver if you ask me.

2009 Nov 19 11:06 AM

[De Graaf]

Much 'savier'...I meant to say ;)

2009 Nov 19 11:08 AM

[Luis de Agustin]

Whatever non-US investors have experienced in returns vis a vis the US dollar, they can expect more. At best, the dollar’s 20% fall against gold the past half year may be called benign neglect on the part of the US Fed, and it’s a historically good bet investors can expect further decline. Not the falling dollar, or the stock market, unemployment nor the price of things, claim Mr. Bernanke’s worry like the banks; the banks, the banks. Falling dollar worries for the Fed and Treasury? Not on the agenda if tighter money could impact the Fed’s principle ward. Foreign dollar holders? Expect more of the same; therefore, what’s the problem when an investor should know what to expect?

Luis de Agustin

2009 Nov 30 06:52 PM