With the US dollar trading at a five-month low, spare a thought for non-US investors invested in US stocks and bonds.

The graph below compares the performance of the US 10-year Treasury Note in US dollar terms (green line) with the same bonds from the viewpoint of a European investor (red line). (Although I am using the euro in this example, the same logic applies to most other non-US dollar currencies.) Since the peak of the US dollar against the euro on March 5, US investors have lost 2.6% on their Treasury investments, but euro investors are completely under water to the tune of -11.9%. The year-to-date numbers are down by 5.6% (US dollar) and 5.7% (euro) respectively.

Source: StockCharts.com

The next graph shows the S&P 500 Index in both US dollar terms (green line) and euro terms (red line). Whereas US investors have every reason to be pleased with a huge return of +27.7%, euro investors received a less sterling but nevertheless palatable +15.6%, given the magnitude of the rally. For the year to date the figures are +0.8% (US dollar) and -0.7% (euro).

Source: StockCharts.com

In the words of Richard Russell (Dow Theory Letters): "The US Dollar Index is sitting on what I term 'the edge of the cliff'. If the dollar falls apart, we're dealing with a whole new story - it will affect almost all investments, US and foreign. The sliding dollar is already putting pressure on Treasury bonds, particularly the long-term 30-year maturities. This is causing our creditors (think China) to cut back."

Will the greenback turn out to be the Achilles heel of the US economy?

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