Foreign currency and macroeconomic analysis

Foreign currency and macroeconomic analysis on the material currency against the U.S. dollar over the 5-year period ending with 2010.

Imagine studying what is going on with currency in the world today, especially with what is going on outside and within the United States. What will one discover through this research? Has the dollar improved or become worse over the years? By learning various coinage, one is able to grasp ways in which it is affecting the world today for the positive or negative.

In 2010, "the U.S. dollar hit a multi-decade high, with three-year volatility near its highest level in more than three decades" (Fidelity, 2011, para 1). This is quite significant because of how terrible the U.S. dollar is doing in comparison to foreign currency. In fact, other countries are doing better than us. A person cannot avoid this issue because of what is happening macro economically with currency today around the globe (Solomon, 2011).

Exchange-rate movements can significantly influence foreign stock returns to U.S.

Investors, particularly, over short-term periods. A strengthening dollar lowers foreign stock returns to U.S. investors because the return achieved in local foreign currency is worth less when converted into relatively more expensive dollars. Conversely, a weaker dollar typically leads to higher returns for U.S. investors: When the U.S. dollar declines

vs. foreign currencies; foreign stocks that appreciate in local currency are worth more when converted back into cheaper U.S. dollars. Please see the chart below (Fidelity,

2011, para 2).

Currency movements have arisen, despite how horrendous the U.S. dollar is doing in the market today. These movements have had "low correlations with the local-currency denominated price movements of foreign stock" (Fidelity, 2011, para 3). For example, in a period of 25 years which ends December 2010, a 0.16 correlation has occurred in regards to that of local currency and on the returns from that of foreign stock (Fidelity, 2011). In essence, this means that "the price of changes of foreign stocks have had little to no relationship with the change in the exchange-rate value of the U.S. dollar" (Fidelity, 2011, para 3).

In order to illustrate this issue, one needs to describe the relationship that is uncorrelated, especially with that of stock and currency movements within the market (Fidelity, 2011). "Austrailian stocks were roughly flat (up just 0.7%) in 2010, but the Aussie currency strengthened signficantly vs. The U.S. dollar" (Fidelity, 2011, para 4). Furthermore, Aussie dollar did manag to have a 14.7% gain; this was after the stocks were exchanged into that of U.S. dollars (Solomon, 2011).

One needs to describe German stock. Theirs managed to rise at least 16.9% locally compared to the U.S. dollar in 2010; however, a weakening did occur, which did result in lower returns of 9.3% for investors in the U.S. This does demonstrate that during any short period that stock prices can move in any direction for the currencies in countries around the globe (Fidelity, 2011).

The "U.S. stocks had a modestly negative correlation (-0.19) versus foreign-exchange movements during the past 25 years; consequently, movements can help lower correlations between U.S. stock and foreign stock" (Fidelity, 2011, para 5). By December 2010, the foreign stock in terms of local currency correlated to 0.75 in comparison to the U.S. stocks. When incorporating the ways of impact with these movements, one needs to look at foreign stocks in regards to the U.S. dollar that made a lower correlation of 0.69 in that same period

. This has occurred over the past 35 years, which does imply that foreign currency have caused a lowering in correlations as well as enhancing diversification by combining stock with the U.S. (Fidelity, 2011).

One needs to discuss the implications of the foreign and U.S. currency. "Currency movements ebb and flow over time and have been extremely difficult with any accuracy" (Fidelity, 2011). In regards to the short-term, this may either ehnance it or detract others from investing from the return one may expereince. With history, this demonstrates that low correlations that are between currency movements as well as stock prices does suggest exposure investors; conseqeuntly, one will view it as a long-term investment. Not much benefits can arise from it, especially with volatitlity and returns that are risk-adjusted (Fidelity, 2011).

As one can tell, from the information provided, that the U.S. dollar is weak in comparison to foreign currency. The same is true with the Euro. This makes it risky for investors with doing trying to take care so stocks for investors. People may decide to buy or sell their stock if one is not doing particularly well at that time. Regardless, issues may arise because of not having a good currency from 2005-2010 for the U.S. (Fidelity, 2011).