Ask Russ: On Currencies & Commodities

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US stocks haven’t been the only beneficiary of signs the US economy is recovering, albeit slowly. The US 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 [for updates on all new ETFs, sign up for the free ETFdb newsletter].

In the seventh 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. If you have an investing-related question you’d like me to answer, please post it in the comments section below. Also, you can check out earlier installments here.

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Q: What currencies to do you think will change in value (increase relative to the US 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) [also check out The Ultimate Guide To Currency ETF Trading].

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 poor performing commodities into stocks. In addition, concerns about rising rates have also likely hurt the asset class [also see Sector ETFs: Biggest Winners & Losers YTD].

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 brick-and-mortar real estate exposure. Real estate prices are still relatively low and, unlike commodities, real estate can provide income.

Source: BlackRock, Bloomberg

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