Dollar Slides from 14-Year High; Can it Bounce Back?

On Tuesday, US stocks seemed at a stable spot to hit gains, again, as the dollar showed a great boost to reach a 14-year high.

Indeed, futures now suggest that the Dow Jones Industrial Average will advance 0.2 percent. This will put the blue-chip index closer to the 20000 mark, which is a level that has the index has never reached.

In addition, the Stoxx Europe 600 index also showed a smooth 0.3 percent in afternoon trading, on its way to hitting its highest close of the year. European stocks show they are on a 20 percent gain over their February lows, which is on track to close out the year 2 percent over where they had started. Finally, the Wall Street Journal Dollar Index—a matrix that measures the dollar against a collection of 16 currencies—also showed a 0.3 percent bump after it set its highest level since October of 2002.

This is marks, then, quite a low time for diversified investors. Those who like to spread their money out may have to wait it out a little longer if they want to see returns. US stocks have been moving higher and higher since the presidential election only a month ago. Bonds, gold, emerging markets, and other trading assets have all been falling.

“The more conservative the asset allocation strategy, the worse the outcome, because fixed-income assets have suffered the most post-election,” explains Columbia Threadneedle Investments solutions global head of investment, Jeffrey Knight.

For example, a $1,000 investment in an exchange-traded fund tracking the post-election S&P 500 would earn you $59.60; roughly 6 percent. Diversifying this into $600 of ETF and $00 in a fund tracking on the Bloomberg Barclays Aggregate US Bond Index would have only netted you half of that: $24.16, or about 2.4 percent.

But analysts also see that the dollar will continue to rise, maybe even to match the euro. Accordingly, Kit Juckers, of Society Generale notes, “The euro is in a fight between short-covering pressure and political angst. Economics doesn’t come into it at all. If Dow 20,000 is just a number but a magnet all the same, euro parity with the dollar will be every bit as magnetic. We’ll get there and get over-excited before too long.”