The Dollar Cleared 100, and That Quietly Reprices Every Foreign Holding You Own

The dollar index traded above 100 on September 17, its first break of that level in weeks, after the Federal Reserve raised rates to 3.75% to 4% and removed the 2027 cuts from its projections. The index had been sitting near 99.30 before the decision. The Bloomberg dollar spot index gained half a percent on the day, its best session in three months.

The move is not large in absolute terms. It is large in what it says, because a currency breaking out on a rate decision is telling you the market has changed its mind about the whole path rather than about one meeting.

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Currencies trade on differentials, not on levels

A currency pair is a relative price, and the cleanest driver is the expected difference between two policy paths. The Fed just raised and signalled more. The Bank of Japan has been moving toward a policy rate around 1.25%, which is enormous by Japanese standards and still a very long way below 4%. The yen carries a 13.6% weight in the dollar index, so that gap alone does much of the work.

What changed on September 16 was not the quarter point. It was the deletion of the cuts. Every model that had the dollar weakening through 2027 relied on the Fed converging down toward everyone else. A median dot of 4.1% at the end of 2027 removes the convergence and leaves the differential in place.

Worth noting that the move is stretched in the short term. The index broke above its fifty and two hundred period averages with a relative strength reading above 83, which is deep into overbought territory by any conventional reading. Breakouts on fundamentals can stay overbought for a long time, but the first pullback in something that moves this fast is usually sharp.

The three places a strong dollar shows up in a portfolio

Whitmore's Watchlist:
UUP (Invesco DB US Dollar Index Bullish Fund): Direct long exposure to the index itself.
VXUS (Vanguard Total International Stock ETF): Unhedged foreign equities, where the currency shows up in your return whether you wanted it or not.
HEFA (iShares Currency Hedged MSCI EAFE ETF): The same developed market exposure with the currency taken out.

The first place is corporate earnings. Close to 40% of S&P 500 revenue is generated outside the United States by the standard estimates, and those sales are translated back into dollars at the prevailing rate. A stronger dollar shrinks them on the income statement without anything changing in the underlying business. Large multinationals feel this far more than domestic small caps, which is one reason a dollar rally often coincides with quiet relative strength in smaller companies.

The second is your own international allocation. If you hold an unhedged foreign equity fund, your return is the local market return plus the currency move. A 5% gain in European shares alongside a 5% dollar rally leaves you flat. The hedged version of the same fund strips that out and gives you the local market, at a cost that is roughly the interest rate differential, which right now is expensive precisely because the differential is wide.

The third is commodities and emerging market debt. Commodities are priced in dollars, so a stronger dollar is a mechanical headwind to their prices, and gold at $4,350 an ounce has been grinding against exactly that. Emerging market borrowers with dollar liabilities and local currency revenue find their debt service rising without borrowing another cent.

Deciding whether you want the exposure or just have it

Most investors hold currency risk by accident. They bought an international fund for diversification and inherited a dollar position they never sized or reviewed, which then behaves like an uncorrelated bet sitting on top of the equity bet they actually wanted.

That is a defensible choice over very long horizons, because currencies mean revert over decades and hedging costs compound. It is a less defensible choice over the next two years, when the differential is this wide and the direction is this clearly signalled by a central bank that just told you its plans.

The useful exercise is not to forecast the dollar. It is to work out how much of your recent international performance came from the market you chose and how much came from a currency you did not.

Whitmore's Take: A dollar above 100 is a tax on foreign earnings and a discount on foreign assets at the same time. Worth knowing whether your international exposure is hedged, because right now that single choice is doing more to your returns than the stocks inside it.

Disclaimer
The content in this email does not constitute an offer or solicitation to buy or sell any financial instrument. All commentary is general in nature and is not directed at any individual investor.

Written by Daniel Whitmore
Millionaire Insiders