FX Impact: Dollar Soft, But Not Vs. Yen
The dollar lost ground around the globe in the week leading up to Barack Obama’s second inauguration. As a result, U.S. investors in foreign countries saw significant gains in equity markets as foreign currencies rallied against the greenback.
The few notable exceptions this week were the South African rand, the Japanese yen and the Egyptian pound, which slid against the greenback amid a series of concerns and events.
The impact from currency doesn’t actually become real until positions are sold. That said, changes in various currency crosses are a crucial factor that investors in globalized markets must increasingly take into account, as our weekly Currency Impact Report that’s based on MSCI data makes clear.
Some of last week’s highlights include:
The yen was notable last week, continuing its downfall against the greenback. As the Bank of Japan continues its monetary easing efforts through a massive asset purchase program, the yen has tumbled week after week. In the past three month, the yen’s depreciation has brought a significant difference in Japanese equity returns between U.S. and local investors, with U.S. investors up 11.16 percent in the last three months, while local investors have seen returns of 26.13 percent in the same period. This has resulted in huge asset inflows into funds like the WisdomTree Japan Hedged Equity Fund (DXJ).
The South African rand also saw a significant pullback against the U.S. dollar this past week, as labor protests in mining and agriculture increased concerns that the commodity-rich nation might experience slower growth in exports. U.S. investors in South African equities saw returns of -2.77 percent in the past week, while local investors booked returns of 1.06 percent in the same period.
The euro saw significant gains in the past week, as well as the last three months, with U.S. investors in European equities coming ahead of local investors by an average of 2 to 3 percent. European Central Bank President Mario Draghi has suggested that the worst of the sovereign debt crisis has passed, with the ECB’s bond-purchase plan still untouched.
The Egyptian pound has been steadily losing ground against the greenback, as the Egyptian Central Bank held its third auction of the U.S. dollar in an effort to control its dwindling reserves. The pound saw significant depreciation after S'P lowered Egpyt’s credit rating to the same junk level as Greece and Pakistan. As a result, in the past three months, U.S investors in Egyptian equities have seen returns of -6.27 percent, while local investors have essentially seen flat returns in the same period.
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