Welcome to EWM Insights where we focus and highlight HUMAN CAPITAL!

In this episode, we explore the forces that shape the value of money, starting with the one currency that quietly influences almost everything: the U.S. dollar.

From the prices you pay at the store to the way portfolios are positioned worldwide, the dollar is at the center of the global financial system. However, behind the scenes, currency markets are far less stable than most people realize—nearly 90% of activity is driven not by trade, but by speculation.

We are joined by Peter Boardman, Portfolio Manager and Managing Director at Nuveen Asset Management. During our discussion, we break down what truly moves currencies, from interest rates and inflation expectations to geopolitical stability, and why these factors matter more than headlines.

We also examine the relationship between oil prices and the dollar, and what that connection means for global growth, inflation, and investment strategy.

Our goal is simple: to bring clarity to a complex system so you can better understand how currency movements shape the world around you and the decisions you make within it

Additional Notes and resources have been attached below.

Feel free to share this episode with those in your circle who are on a similar path of learning.

We hope our conversations will help you acquire more knowledge, become even more curious about the gifts that are in and all around us, while supporting you to reach new heights as we grow together.

You can subscribe and listen to EWM INSIGHTS on Spotify, Apple Podcasts, Amazon Music, or the Ellis Wealth Management Homepage: https://elliswealthmanagement.net/podcasts/

Above all, through EWM INSIGHTS we want to encourage you to:

INVEST IN WHAT YOU LOVE!®

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Takeaways:

• The value of a currency is primarily influenced by a country's economic situation, including interest rates and political stability.
• A significant portion of currency transactions is driven by speculation rather than fundamental economic activities like trade.
• The US dollar remains the dominant currency in global trade, accounting for a substantial percentage of foreign exchange transactions.
• Higher interest rates in the US attract foreign capital, thereby strengthening the dollar compared to other currencies.
• Commodities such as oil and gold are predominantly priced in US dollars, which impacts inflation and economic growth globally.
• Investors should consider the implications of currency fluctuations on their portfolios, particularly with regard to international assets.

Links referenced in this episode:

• www.elliswealthmanagement.com
• www.nuveen.com
• www.cnbc.com
• www.nikkei.com
• www.greenwichassociates.com

Peter Boardman manages the Nuveen International Value Strategy Fund focused on finding opportunities in non US equity markets.

Welcome to Insights. This is Paul Ellis, Managing director of Ellis Wealth Management, where we encourage you to invest in what you love.

Ellis Wealth Management is an independent financial services firm focused on planning, advice, coaching and investment management. We are dedicated to the families we serve and we encourage you to invest in what you love.

Within Insights, we look at ways to make our world richer through focusing on sharing and developing human capital. Well, all right. What a beautiful day it is in the beautiful Pacific Northwest and we are so glad to have an opportunity to speak with you today.

You know, there's phrases that we hear all the time on the news that, that sound important but rarely get explained. Bond yields were down. The 10 year treasury is at 4%.

Markets were shaken, the yen carry trade caused a disruption or even the dollar strengthened against the euro. And it can feel like a financial members only language, but it's not.

Because whether you realize it or not, the dollar quietly influences what you pay, what you earn and what your investments to do. Today we're breaking it down. Currency 101 with a focus on the role of the US dollar.

And today I'm joined by Peter Boardman, Portfolio manager and and Managing Director at Nuveen Asset Management. Peter's been highly ranked as an analyst in the surveys of Greenwich Associates, Institutional Investor magazine and the Nikkei newspaper.

He's also fluent in Japanese.

Peter is a trusted source for information on the Japanese markets, the global markets, and is quoted regularly in the Nikkei newspaper and also appears on CNBC Asia. Peter, good morning.

Good morning, how are you?

Oh, never a dull, never a dull moment watching these markets and the news. So thank you so much for being with us today.

Let's start simply when we, when we talk about the value of the dollar, what are we actually talking about?

Sure. So in general, it's a country's economic situation that drives the long term value of a currency.

The key drivers being interest rates, inflation rates, GDP growth, trade balances and political stability.

However, saying that in reality a very small fraction like 5 to 10% of the $10 trillion daily turnover market is due to fundamentals such as real trade like importer exports, with the remaining 90% of currency transactions based on speculation. So I'd break down the speculators into three different groups.

The first are pure speculators such as banks and hedge funds which are betting the currency prices will increase or decrease due to potential changes in expectations.

The second are what I'd like to call, you know, hedgers who hedge transactions for buying or selling bonds or trade or taking advantage of interest rate Differentials such as corporations and banks. And the third are people who are who do trading in currency pairs such as euro dollar or euro yen.

Traders taking advantage of multiple interest rate differentials using foreign exchange options. You know, given the processing power of corporate computers, this, this third category can identify and trade these inefficiencies in seconds.

The currency market is huge and has been growing with trade. Over the last several years, currency transactions have grown by about 5 to 10% per year.

The market expected to further grow, especially with the increased use of artificial intelligence in trading strategies and electronic trading venues. Moreover, increased currency volatility has driven higher demand for hedging instruments such as foreign exchange options.

There's a group called the Triennial Group that they do surveys every year. It's really a comprehensive source of information on size and structure of global forex, foreign exchange and OTC interest rate derivative markets.

The euro was the second most actively traded currency with a share of 28.9% followed by the Japanese yen at 16.88%. The share of sterling decreased to 10.2%.

Trading in the Chinese renminbi and Swiss franc increased the four the frank advancing to become the six most traded currency. In general, people often use inflation expectations and interest rate expectations.

They understand the direction of currency rates and attempt to predict the value. Higher interest rates attract foreign capital, increasing demand for currency, especially short term rates.

We often compare the differences in two year interest rates to understand the trend. So for example, compared with the current fed funds of 2.75%, the current 2 year interest rate outlook is around 3.6%.

Bank of Japan rates are currently 0.75% but 2 year JGBs are about 1.1%. So there's a 2.5% differential between the US Treasuries and Yen. As US bonds are about 200 basis points that the trend is more interest.

There's more interest in owning U S Treasuries compared with yen. This can also be confirmed by looking at real interest rates. US rates are around 2% compared with Japanese rates at around 1.3%.

So since real rates are higher in the US and Japan, people are more likely to buy want to hold dollars than, than yen, which is why we've seen the yen weaken to current level, about 159 yen in the dollar. So now that. However, now that oil prices are on the rise, it'll be interesting to see which country's inflation rises more.

So why are gold and oil priced in dollars versus yen versus the euro?

So what is really the role of the dollar? And there's basically two reasons.

The dollar is the dominant currency for international trade. And assets held in dollars are seen as a superior store of value. When countries face instability.

Commodities such as gold, oil and natural gas are priced and sold in dollars, even in transactions outside the U.S. so while gold and silver have made a comeback recently, as central banks look for alternatives for the dollar, the majority of central bank assets are held in dollars.

Moreover, Bitcoin and other cryptocurrencies are valued in dollars, which means that even other digital currencies, which are thought of as currencies alone, are valued in dollars. Which is, I think, kind of ironic.

It is. Now, does that strengthen the, the desire for dollars by having Bitcoin and these other things connected to or valued in dollars?

Yeah, I mean, if you think about why people would own dollars, the other reason is that basically it's the primary reserve currency, so, which accounts for about 58% of foreign exchange reserves. So 88% of foreign forex transactions and over 50% of trading invoices.

So central banks hold 57% of their foreign exchange reserves in dollar denominated assets, primarily U.S. treasuries because they're seen as safe and high liquid.

You know, roughly $64 billion of global debt is denominated in dollars, meaning that foreign corporations and governments frequently borrow in dollars to ensure stability. So even with the US economic downturns in the past, the dollar is considered a safe haven currency.

And foreign investors will rush to hold dollars during times of stress.

This as US Investors, this gives us a lower cost of capital, allowing US to borrow at lower rates and at the same time it allows the US to sustain a persistent trade deficit.

Can you explain that trade deficit and how that US dollar works? I think you mentioned that the spread on the US dollar, the rate was at 2% on that two year the interest rates.

Right.

The interest rate was 2% and the Japanese yen, which is the third most traded currency was much less than that. And, and how does that work with trade? Can you explain that?

Sure.

I mean, first of all, as I mentioned earlier, the trade is less of as a reason why currencies move up and down than the expectations of some sort of change in trade or inflation or growth.

And so countries which tend to have higher expectations of inflation, higher expectations of growth tend to have, the market sees that and you, you'll see more money going, going into those countries which then drives down the interest rates but also leads to a strengthening currency.

So given this is, you know, the market flows every second, there's this constant buying and selling of dollars versus yen, dollar versus Euros, euro versus yen concentrating that leads to a market achieved currency rate which is always wrong in the sense that it's constantly fluctuating based on the players expectations of where inflation and GDP and economic activity is going to be higher or lower in the future.

So when they talk about the, the trade deficit or they talk about the economy, is it, are those, are those separate? When they talk about the economy and the strength of the US dollar versus the yen and the euro, are they separate or are they combined?

They're all combined.

So a country that has a trade deficit will often depending on the reason for the trade deficit, it could be because you are importing more machines or goods from out outside the country in order to grow in the future, such as China did 10 years ago.

They ran trade deficits for over 10 years because they're importing, you know, airplanes, they're importing machines, they're importing goods, agricultural products as they were becoming richer and richer and richer.

And at one point, you know, that hits a point where the growth then starts accelerating as a country sees, you know, moves from, let's say an agricultural country to a more mechanized or industrial country and then they start exporting. Initially when a country is, you know, importing a lot, the trade deficit rises and currency is weak.

After the imports have been finished or at least the country moves up the economic ladder, then you start seeing reversal and that country exporting more and like you're seeing in China and the currency should in theory should strengthen.

Now the other part is A lot of this is about how people hedge as well because you know, hedging is a large part of currency trading, you know, and this has high implications for countries with very high budget deficits, you know, with only, with, only to increase with the war and potentially higher inflation. So some investors for example will hedge the currency and order to reduce their currency risk.

But I find it's very difficult personally for our strategies. I find it very difficult to fully hedge the currency risk given time value, money and constant inflows and outflows of our funds.

Also the cost of a cost of strategy from hedging ultimately gets paid for by the clients. And so we, we tend to think well, we don't want to know, charge our clients for hed hedging.

And then finally the currency can often go in your favor and may lead to you underperforming peers. So for example, last year the MSCI EA index which is for non developed for developed markets overseas rose by 31.2% in dollar terms.

So hedging would have actually taken some of the return off of the table in that instance, correct?

Exactly, exactly.

And so the way I, I think about it is and the way our strategy think thinks about it, by building portfolios from the bottom up, we can take an opportunistic approach towards foreign exchange with stocks which may benefit from our view of the currency.

So for example foreign, our holdings in Japan will hold large exporters like Toyota or Mitsubishi Electric or SMC which is a Japanese machinery company or and even seven I Holdings which owns seven eleven chain in the US is a beneficiary of weaker yen and the stronger dollar as, as they own 711 in the US and so if the US dollar strengthens that means the value to 7i holdings Japan increases as their holdings in 711 in the US rises with a weaker yen.

So as investors overseas we actually think about, well, are there names in, in Japan that could benefit from the stronger yen if, if things were going the opposite way?

And so we, we own Japan Airlines for example, which partially is a, as a partial hedge to our portfolio which benefits from a stronger yen given that oil is quoted in dollars. And they would benefit from obviously lower oil prices in Japanese yenterns.

So a person doesn't need to actually trade the currencies to be affected by them number one. And number two, depending upon the holding, they may actually be involved in benefiting from those changes in currency.

Just as more people are flying to Japan or more people are purchasing Toyota, I mean it's built into the product. Am I understanding that correctly?

That's correct. Exactly.

Okay. And, and did you share that seven eleven is owned, is a Japanese company?

Originally SE seven eleven US was owned by a company called South Southland in Dallas in Texas.

Okay.

And it went bankrupt about 40 years ago. And Seven I Holdings, which was the subsidiary, the Japanese subsidiary of Seven Eleven US actually bought the parent.

Oh wow.

And so they took it over. And, and as well as their Asian business, if you go to Asia, 711 is everywhere.

They've, they use joint ventures with CHK Group in Thailand and they have, you know, the President's group, Uni President Group in Taiwan. So they have joint ventures all over the, all over Asia.

And now the Japanese now have taken, taken over 711 in the US and they're trying to, you know, fix it in a way because they, they've had challenges due to weaker consumption in the.

US So every time I fill up, run inside and get a big gulp, I'm actually participating in a global trade. That's, that's good. That is good.

Well, we live in a, we live in a very global market no matter what people say.

Even running into 7:11, I would never have guessed. So share if you would the invest implications and a little bit more about this commodities connection or this commodities link.

We're hearing a lot about oil right now because of what's going on in, in the Middle east and the, you know, the price of per barrel per oil has gone up a lot. Can you explain that link as it connects to the US dollar as well?

Sure, sure.

And obviously, you know, when I talk to our clients on what is on their client, our client mind, the biggest topic conversation is the Iran war, the outcome, the impact, Europe's energy disadvantage versus the U.S. obviously politics, AI and you know, sort of U.S. economic bifurcation impacts. So you have to really think about these short term versus long term risks.

As an investor, I try to think long term because I just can't keep up with short term volatility in the markets.

It's just impossible for anybody to stay ahead of it because it's just obviously, you know, yesterday everybody thought, you know, the war would come to an end in two weeks and now it's, you know, looks like it's going to long last for a lot longer.

So, and so the thing about oil is that the rule of thumb is that a $1 per barrel increase for the cost of oil results in a 4 cent increase in gas prices. So a 100 increase in the cost of oil leads to a four dollar increase and gas prices at the pump, assuming there's no demand destruction.

So you know, the Straits of Hormuz has large trade in oil.

It also has obviously impact on other things like natural gas and urea and nitrogen for fertilizer, sulfur, helium used for cooling, cooling power plants.

So if you think about, you know, oil having increased from $50 a barrel to a hundred dollars a barrel, that has obviously increased the dollar, the price of a barrel by $50 or if you divide it by 25, that would have been a two dollar increase in your, in your price of oil.

So and, and thinking about oil going forward, given there's about 20 million barrels of oil traveling through the Gulf every every day and about half of that's been unable to be delivered, that leaves about 10 mil barrels shortfall right right now. So our analyst thinks that for every day that streets are closed, that could add about $2 per barrel for the cost of oil.

So another month of the current situation, you could see oil prices rise from let's say $111per barrel to $175, which obviously, you know, people are projecting that for next month, which is obviously why you want to open up the straight zone is because at $175 oil, you'll probably see the average at least I'm in Cal, I live in California. Right now it's about $6. It'll probably go to $8 and 50 cents if it keep on increasing.

The other aspect of oil is, and obviously is commodity inflation is the rule of thumb is that a 10% increase in oil prices reduces global growth by 0.15% and adds about 40 basis points to inflation. So as Brent oil prices have increased over the year by about 90% to currently $110.

And if they stay there then that would reduce global growth by about 1.4% which basically means there'd be very, almost no growth globally and add about 3.6% to global inflation. So you know, currently inflation in the US for example is about 2.45%. That could add another 140 basis points to inflation.

And you know, as we saw in the, in the first and second OPEC oil crisis, at least we don't have shortages so that people stay in line waiting for oil. But at the same time it is inflationary. And the definition of stagflation where you have higher inflation and Lower growth.

I remember those, those days with the. Now granted I was smaller and I was sitting in a, in a car seat. But you know, and I think we've talked about it before.

We, we mentioned in one of our conversations in the past about the movie Die Hard and the, you know, the Nakatomi Tower and you know, the Japanese market. We, we had that conversation in the past. But there's a scene in that movie where the policeman goes in to buy some Twinkies.

I think it was like at a 7 11. So we've still got the 711 connection here.

But we certainly don't want it to get to eight or nine dollars a gallon either. Right.

I mean you're already starting to see certain signs of demand destruction around the world. You've, we've heard of countries like in the Philippines and other Asian countries who just can't.

Asia has been especially hit because so much of natural gas and oil has come from the straight Hormuz and so many of these countries are now going from a five day work week to a three day work week due to shortages.

And you know, obviously right now farmers are in the process of spring planting and the expectations earlier was that oil prices and commodity prices would stay low. And so many of the farmers apparently had held off from buying a fertilizer.

And so that's obviously you're hearing signs of costly increases in fertilize prices and that's going to show up in the food chain at some point in the future. So it's obviously inflationary. Obviously the question is speed of that inflation and being able to find alternatives that are more reasonable.

But it's certainly going to be, you know, painful. Can't deny that. And so, you know, it's just, it is what it is.

So that dollar connection, if oil is mostly purchased with the US dollar as the reserve currency, it is going to have an effect on the strength of the dollar because that oil price is going to go up. It needs to be paid for in dollars. So that's going to have an effect on our US Dollar.

We've mentioned you don't need to trade currencies to be affected by these other things because it's already built into some of the other items that we purchase. And you're mentioning fertilizer, which goes to food, also goes to other items.

And it's part of the operating system of the global economy that these things are connected to each other and one thing definitely affects the other. Am I understanding that correctly?

That's correct. And, and these, these commodities, as mentioned earlier, they're all global commodities. Oil is a global commodity.

Gas is a, you know, natural gas is a global commodity. Gold, silver, they're all natural commodities. They're all price in dollars.

And so if the dollar were to strengthen, that would be good for the U.S. because you're, if you're importing from overseas, it means that your import costs are going to decline. But at the same time there's offsets.

This is transportation costs, you know, bunker fuel for a ship or diesel prices for a truck have increased and so their offsets on everything and ultimately the price of goods will increase. And ultimately that's going to lead to some sort of demand destruction. And so, you know, what do people give up?

And this is kind of one of the issues with what they call the K shape economy in the US where you have people on the higher end of the wealth spectrum have done quite well for themselves and they seem to be propelling the economy while people on the low end have been hit hardest and they've been more of a drag on consumption in the US So with.

A strong dollar, if someone wanted a vacation and if they could afford, because the, the tickets are going to be, ticket prices are going to be higher. But if they could afford to go to Japan or go to Mexico or go somewhere else, they would probably get more for their dollar. Is that correct?

That's, that's correct, yeah.

The barrier to entry is going to be the price for the fuel to get there. But once you're there, you'll have a lovely vacation. When you come back, you might have a little bit of, a little bit of sticker shock.

You had also mentioned that you don't follow the short term because, because that changes so rapidly today. You know, things can change, in some cases hourly, in some cases, you know, daily or weekly.

But where do you think the, this, the strength of the US dollar in our economy looks what it looks like by the end of this year?

Well, we don't really project growth with our strategies. What we try to do is understand what the markets give us, what are expectations being built into the overall economy.

And often consensus is much slower than the markets. And so the, the outlook.

But if I, if we look at consensus numbers, they're still pretty healthy overall expecting 8 to 9% earnings growth in the US this year with you know, GDP around over 2%. But you know, that that could change obviously with the outlook how long these binary events like a war can last.

You know, in Europe, for example, you know, the Eurozone and the UK are more vulnerable to higher oil prices.

You know, war between Russia, Ukraine meant that Europe had to find new sources of energy, such as buying LNG from Qatar, which now has been more or less cut off. In fact, you know, pre Russia invasion of Ukraine, Europe imported about 25% of their energy from Russia. Now it's only like 5%.

Europe imports about 64% of its energy, consisting of oil and gas and coal. And so what we've seen is that at the beginning of this year consensus growth for Europe was eps growth of 13%.

Year on year it's still at 13%, which is kind of crazy. And a lot of it can be on the expectations of cyclical growth.

But if you compare it, let's say if you clean up for sectors like the autos, which would go from negative to positive, the estimates are more closer to 8 or 9% growth, which I still think is, is too high.

So you know, given the fluidity of the Iranian situation, outcome being binary, it's likely that, you know, results of higher oil inflation rates, lower growth versus our, you know, pre war consensus estimates at $100 oil, you'll probably see Europe with no earnings growth this year.

Remember the difference between the US and Europe also is that the mandate by the, the Federal Reserve is to maintain price stability so keep inflation low at 2% and then also employment stability, keep be fully, fully employed. In Europe, it's only about inflation. They don't use the employment mandate, so. And they also use a 2% target for inflation.

So with inflation now running probably around 2 1/2% in Europe, you'll probably see actually Europeans raising interest rates sometime in the next couple months and which ultimately could lead to the Euro strengthening versus the dollar and consequently making European goods more expensive for Europe. U.S. importers.

Excellent. Well, that is interesting. You know, I've got to share this with you. You know, I'm a movie buff.

One of my favorite lines from the movie Pirates of the Caribbean is when Johnny Depp is speaking to a young Will Turner and he Johnny Depp is telling Will Turner, you're a pirate. And he says, I don't care about treasure. I'M kind of paraphrasing, but Will Turner says, I don't care about treasure.

And Captain Jack Sparrow or Johnny Depp shoots back, not all treasure is silver and gold, mate.

And so, you know, we're talking about the US Dollar and the, the impact that it has as a part of the system or the backbone for the system, how it's connected to everything with the commodities from oil to clothing to, and how in the long term, how this affects both international trade and being able to purchase things here and abroad.

The thing that I love about speaking with you about the markets is that we have the opportunity to talk about the markets, but we understand that not all treasure is silver and gold. It's our families, it's our day to day, it's the clients that we work with.

And, and I really appreciate you taking time away from your family today to spend time with us to talk about this topic that is quite confusing to a lot of people and they're hearing it more on the news now because of what's happening in the Middle East. So thank you so much for your time today. Truly appreciate it.

PETER okay, well, thank you very much and please have a good holiday this weekend and hope everybody is safe and well going forward.

Terrific. I want to encourage everyone to always invest in what you love.