Q1 Recap: US Dollar Strength Has Widespread Effects

ThinkstockPhotos-180857425The big story for financial markets in the first quarter of 2015 was the surge in the value of the US dollar against foreign currencies, particularly the Euro. The dollar’s gains resulted in losses for international bonds, which lose value for US investors when the dollar strengthens. They also contributed to negative returns for commodities, which continued their struggles after being the worst-performing asset class in 2014.

Cheaper currencies helped many international economies, leading to gains for both developed stocks and emerging stocks. Even after accounting for the declines in value that US investors faced due to the currency movements, these were the two top-performing asset classes in the first quarter.

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The utilities sector, the top-performing stock sector last year, went from first to worst in the opening quarter of 2015. Not every sector reversed course, however. Energy, which was the only sector that posted negative returns last year, added to its losses as commodity prices continued to fall.

After losing almost half of their value last year as the oil price collapsed and economic sanctions were implemented, Russian stocks clawed back some of their previous losses. Columbia and Greece, also two of last year’s worst performing countries, weren’t so lucky: both posted sharply negative returns again in the first quarter.

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The outlook for the rest of 2015 depends on a few key factors. One is when the Federal Reserve will begin raising interest rates. The Fed recently tweaked the language of its formal policy statement, suggesting that the era of near-zero interest rates is coming to a close. But there’s also been some weaker-than-expected economic data and a low inflation rate, suggesting that the Fed may not take action until late this year. If the Fed acts too soon or raises rates too far, US stocks could be hurt.

Politics will also affect the investment outlook, particularly in Europe. The election victory in January by Greece’s anti-establishment Syriza party has led to fears that Greece may exit the euro zone. Though Greece and its creditors agreed to a four-month extension of its current bailout agreement, whether they’ll be able to come to another agreement when the extension expires is unclear. Elections in the UK in May and Spain toward the end of the year could create additional uncertainty in financial markets.