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First Quarter in International-Equity Funds: Reversals Call the Tune

Many fourth-quarter trends did not extend into the new year.

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To a large degree, the first quarter of 2017 marked a time of reversal for international-equity funds—in a good way. Reversals of some influential trends in global markets that had worked against international-equity funds in the fourth quarter of 2016 turned in a more positive direction in the first three months of this year.

Most noticeable was the broad decline of the U.S. dollar. The dollar had risen in the fourth quarter, especially after the U.S. election results, as investors reasoned that the new administration’s policies would attract investment to the United States and boost the dollar (as would the expected continuing increases in U.S. interest rates). With the vast majority of U.S.-based foreign-equity funds being unhedged—meaning they buy their stocks using foreign currencies and thus their returns suffer when those currencies decline against the dollar—that dollar rise dampened their fourth-quarter returns. (Over time, the impact of the rising dollar can be partially offset by the fact that weaker local currencies help exporters, but that can take awhile to play out.)

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.