As Russ discusses, we remain in a strong dollar environment, which continues to have consequences for the market.

2018 started with investors asking the same question as every other post-crisis year: Is this the year rates finally rise? In fact, the answer has been yes, although the backup in rates has been modest. U.S. 10-year yields surged in January but have been range bound ever since. Instead, as I wrote back in early July, the dominant return driver has been the dollar. Whether or not the dollar remainsstrong is likely to be as, if not more, important than the direction of rates.

One currency to bind them

Two months ago, I suggested that you could explain much of the first half’s performance by referencing the dollar. The first two months of the third quarter is proving to be more of the same.

While the dollar has been flat since June, it did hit a one-year high in August and remains 7% above the spring low (see Chart 1). In other words, we remain in a strong dollar environment, particularly against emerging market currencies.

dollar index

As the dollar has remained strong, dollar sensitive assets are still under pressure. In most cases things have only gotten more challenging. Since the end of June, gold is down another 3.5%. Industrial metals, notably copper, have fared even worse.

Outside of metals, the main casualty of the dollar has been emerging markets (EM). EM stocks managed a brief, but fleeting, rally in July, but the MSCI Emerging Market Index is now trading at its lowest level in over a year. At the same time, locally denominated emerging market debt is also getting hit, as EM currencies continue to lose ground against the dollar. The J.P. Morgan GBI-EM Global Diversified Index is now down 6% since the end of the second quarter and nearly 14% year-to-date.