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Some Side Effects Of The Brexit

Brexit US Dollar

Image source: GERARD BOTTINO / Shutterstock.com

What's going on?

There were some important impacts from the Brexit vote that weren’t as obvious as the huge selloff in global stocks. Perhaps the most important of those for global investors was that the value of the US dollar jumped significantly versus most other currencies.

What does this mean?

The economy in Britain and Europe is likely to be weaker than it was prior to the Brexit vote – which is one reason that both the pound and the Euro fell significantly on Friday (click here for an explanation of why that happens). Since the damage to the US economy is likely to be much less, global investors flocked to put money into the US (which involves buying the US dollar). That’s why the US dollar went up by about 2% versus a collection of other major currencies.

Why should I care?

The bigger picture: A stronger dollar creates more of a headwind for the US economy. US products are now more expensive for overseas buyers – and so they’ll probably buy less from the US. Also, the profits that US companies make overseas are worth less when translated back to US dollars. The result is typically bad for US stock prices, which is a big reason why they sold off about 3% on Friday.

For you personally: Investment returns tend to be measured in your “home” currency. For example, UK investors that own US stocks actually made quite a bit of money on Friday (in pound terms) because the dollar increased versus the pound much more than US stocks fell. Conversely, US investors in UK stocks lost roughly 12% in US dollar terms (rather than the 3% decline that UK stocks experienced in pound terms). The ultimate result of Friday’s moves on individual’s investment portfolios comes down, largely, to what currency it’s being measured in.

Originally posted as part of the Finimize daily email.

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