Weekly Buzz : 💲 Why the dollar’s in hot demand

Traders entered the year predicting that interest rate cuts would come earlier rather than later, and that the US dollar would fall in turn. Instead, we’re now seeing the dollar gain more than 4% against its developed and emerging market counterparts.

What’s behind the dollar’s strength?

The first thing to note: the US economy has been surprisingly resilient. It grew by a respectable 2.5% in 2023, despite expectations for a downturn that year, and the International Monetary Fund forecasts that it’ll grow by 2.7% this year – more than double the rate of any other G7 country. That’s boosting demand for the country’s financial assets and, in turn, the dollar.

Second, America’s inflation problem is proving to be quite stubborn, coming in hotter than expected in the past few months. That’s pushing traders to scale back their bets for interest rate cuts by the Federal Reserve, boosting the dollar. After all, higher-for-longer interest rates only increase the dollar’s appeal among international savers and investors.

The other major factor behind the dollar’s strength: geopolitical tensions. Recent conflicts – especially in the Middle East and Ukraine – have got the markets worried, and that’s pushing investors to safe-haven assets like gold and (you guessed it) the dollar.

What’s the takeaway here?

These tailwinds might give the US dollar further room to appreciate, and market traders are betting on that. They’re amassing bullish positions in the futures market (our Simply Finance below explains) and staking bearish claims against other major currencies – a stark contrast to the start of the year when they were betting that the dollar would fall.

If you’re looking to add more of the strength of the world’s reserve currency to your investment mix, our Flexible portfolios let you do just that. Simply create a Flexible portfolio with our USD Cash Yield template, and you’ll be adding exposure to 0 to 3 months ultra-short duration US Treasury bills, letting you earn US dollar-denominated yields of 5.3% p.a.

💡 Investors’ Corner: The difference between price and value

Looking at different valuation methods for companies can offer a fresh way to think about stocks. And it’s not just semantics; when it comes to investing, pricing a firm versus valuing it can mean very different things:

• Pricing often involves assigning a ‘price multiple’ to a company’s earnings, with that multiple changing based on the market’s expectations. The most popular pricing method is the price-to-earnings (P/E) ratio – if a company trades at a P/E multiple of 20 times, that means investors are paying $20 for $1 of its current earnings.

• Valuing a company usually means factoring in the assets and debt a company holds. This provides a picture of the firm’s actual value, and not just what the market believes it’s worth. This is what Warren Buffett prefers, and to quote him on the subject, “Price is what you pay. Value is what you get.”

Both pricing and valuing have merit. In a CFA Institute survey of 2,000 analysts, 88% said they use the P/E ratio, and 77% use a ratio that includes value. Generally, ratios based on either price or value move in lockstep. But sometimes they go their own way – and when that happens, you’ll want to look at why.

Using multiple approaches when it comes to determining a company’s worth is useful, as long as you’re aware of the differences and limitations of each. But, as is often the case when it comes to research, a combination of methods is probably your best bet.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Futures market

A futures contract boils down to a buyer promising to purchase an asset, or a seller promising to sell an asset, at a fixed date and price in the future. While originally created for commodities like wheat or oil, futures now span a plethora of markets, including cryptocurrencies.

Traders can use futures to hedge against risk, or to speculate on price movements. The futures market, where these contracts are traded, is like the financial world’s crystal ball, peering into a future that’s based on expectations.