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Assets to avoid as the dollar rises

Assets to avoid as the dollar rises

The strength of the US dollar is bad news for most emerging markets and assets such as oil and gold, according to Henna Hemnani.

The assistant manager of four multi-asset funds at Miton said a rise in the value of the dollar was typically bad for emerging market equities relative to developed markets.

The dollar has risen in value in recent weeks according to Andrew Herberts, head of private investment management at Thomas Miller Investments.

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He said the dollar has risen in value because it is viewed by many as a "safe haven" asset at a time of rising uncertainty.

This is bad news for emerging markets because these companies and countries tend to have debt denominated in dollars, so a rise in the value of the dollar means higher borrowing costs, leaving less cash for shareholders.

This leads to investors pulling cash out of emerging market equities and into those of developed markets, boosting valuations.

Ms Hemnani said investments in commodities such as oil and gold also tend to perform badly when the dollar is strong.

This is because all commodities, regardless of from where they are extracted from the ground, are priced in dollars. So a strong dollar makes all commodities more expensive, reducing demand.

As an asset class gold vies with the dollar to act as a safe haven in times of market strife. If the dollar is rising in value, then the attractiveness of gold as a safe haven is diminished.

David Miller, investment director at Quilter Cheviot, said: "Dollar strength is a good example of what happens when the consensus gets it wrong. Back in January, forecasters predicted another down year citing deficits and eccentric government as the main drivers.

"The prospect of higher interest rates, which typically is a reason to buy a currency, was set aside. All was well until a couple of weeks ago when it became clear that none of the other major central banks around the world were in any position to put up rates.

"The strength of the dollar is having a knock on effect around the world with the currencies of peripheral economies taking the strain."

david.thorpe@ft.com