• And why the Fed matters more. Though European Central Bank President Mario Draghi heightened expectations for even more monetary support for Europe’s beleaguered economies, the upcoming shift in the Fed's monetary policy matters more. In Europe, the path from potential QE to the real economy flows through the currency, and already with some success. But the greater the impact of QE on the currency, the less the impact on dollar asset prices.
  • Exorbitant privilege. The dollar is the world's reserve currency, what the French called the U.S.' "exorbitant privilege". Increasing economic divergence between a strengthening U.S. and a weakening Europe led to both a widening gap in U.S. vs. European interest rates and a declining euro. Because global debt outstanding, global trade, global reserves and global currencies are predominately dollar based (facts indicative of reserve currency status), the upcoming shift in U.S. monetary policy expectations holds greater impact for the outlook for financial markets than any potential ECB program of broad-based Quantitative Easing.
  • A Rising Tide…may lift all boats, but a rising dollar sinks oil and gold. Recent declines in oil and gold reflect a stronger dollar, which in turn reflects heightened expectations of Fed policy normalization. Leaving the era of zero rates behind undermines the attraction of gold. Falling oil prices reduces the re-cycling of petrodollars back into U.S. Treasuries, reducing that source of support for low yields. Declining oil prices also function like a tax cut for U.S. consumers, bolstering disposable income and increasing the outlook for consumption and U.S. growth. That can further undermine expectations for continued zero interest rate policy and potentially shift both the pace and terminal rate of monetary policy, leading to higher interest rates in the U.S.

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Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.

The opinions expressed are those of BlackRock as of September 12, 2014, and may change as subsequent conditions vary. Information and opinions are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable. The information contained in this report is not necessarily all-inclusive and is not guaranteed as to accuracy. Past performance does not guarantee future results. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. Investment involves risk. Reliance upon information in this report is at the sole discretion of the reader.

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