U.S. Dollar Strengthens; Market Remains Mostly Unchanged

Past 30 days, the U.S. currency has gained about 8% against pound, yen.

August 17, 2008
By: Jerry Cole - Retirement, Investment

Two related measures interacted this week and caused the Dow Jones Industrial Average to remain mostly unchanged. The average ended the week down 0.6% at 11659.9.. The two measures were a rise in the U.S. dollar and a decline in the prices of materials.


When a currency strengthens, it's usually a sign of health in the underlying economy. However, in this case it is more likely due to signs of weakness in other economies. Recent reports have showed that the economies of Japan and Europe contracted in the second quarter, and the U.K. slowed. It is therefore looking less likely that other parts of the world will be immune to the economic problems we have been experiencing here in the U.S.

On Friday the euro fell 1.4673 against the dollar, and the dollar fetched 110.51 yen. The British pound has fallen against the dollar for 11 straight days, it's worst such streak since at least 1982. Over the past month, the U.S. currency has gained about 8% against the euro and the pound, and almost that much against the yen.

The recent strength in the dollar is because, as the economies of the rest of the world decline, their demand for oil and other commodities lessens. These goods are typically priced in dollars, which makes them more expensive as the dollar strengthens. This, in turn makes it harder for producers to increase their prices.

When changes such as this occur, you have to be sure you understand how to interpret their effect on the "market". Most investors consider the market as measured by the Dow Jones Industrial Average. That average is made up of 30 large blue chip stocks and the term "industrial" is somewhat of a misnomer since 5 of the 30 stocks are financial in composure. Those five stocks are: American Express, American International Group, Bank of America, Citigroup and JP Morgan Chase.

The five financial components of the Dow have fallen sharply in the past months amid Wall Street's credit crisis. Thus, since the DJIA weights all of its stocks by share price, the energy components (Exxon Mobil and Chevron) now represent a bigger chunk of the average. The strong performance by the energy sector has served to prop up the Dow Jones Industrial Average, but on Friday, Chevron's shares were down 2%, while Exxon was down 0.5%. Another commodity- oriented component, Alcoa, was off 0.2%.

So as the global economic slowdown continues, raw material prices should continue to lower. Crude futures ended the week $1.24 lower, off 1.1%, at $113.77 a barrel. The commodity has now dropped 22% from its record in early July. This is surprising considering the conflict between oil-producing Russia and Georgia.

So it ain't easy to fathom it all. Next thing you know, investors will be returning to the financial stocks!

In the meantime, be sure to keep your risk within your tolerance and keep ahead of inflation.

I invite your questions.

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation or of www.mybaycity.com)