As we highlighted in a previous blog post, answering the question of what the U.S. dollar is actually worth depends heavily on the reason one asks the question in the first place. With foreign exchange volatility garnering more financial press headlines recently, investors are increasingly cognizant of the impact foreign currencies have on the returns of their stock and bond portfolios. As we reasoned previously, by measuring the dollar against its largest trading partners and most frequently traded currencies, we have sought to create an intuitive approach to tracking the value of the dollar over time.
The Bloomberg Dollar Spot Index (BBDXY) tracks the value of a basket of 10 currencies against the U.S. dollar. Through our approach, we believe that the index takes into account three primary roles the dollar plays in the global economy: what role the dollar plays in global trade, how it impacts the relative attractiveness of foreign assets, and what impact owning foreign assets has on the value of investors’ portfolios.
In our view, the ICE U.S. Dollar Index’s (DXY) static approach to answering the question of the dollar’s value does not accurately reflect the role the dollar plays in the global economy, nor the impact it has on investors’ returns. While international fixed income investing is only beginning to catch on in the U.S., investors have for decades allocated a portion of their portfolios to international equities. As shown in the table below, the two most popular approaches to broad-based international equity investing are represented by the MSCI EAFE Index and the MSCI ACWI ex-US Index.