Looking ahead at Fed policy:
The perils of a strong dollar

Roger Early
Executive Director, Head of Fixed Income, Co-CIO — Total Return Fixed Income

We’ve been concerned about the Federal Reserve’s operations, actually, for a number of years since the financial crisis. The constant addition of another wave of quantitative easing seemed to us to overdo what was needed within the economic environment. So, we weren’t surprised when the Federal Reserve finally reached a point where they felt they needed to raise short-term rates. We were surprised that the Federal Reserve raised rates at a point in time when the economy was probably weaker than it had been two years earlier.

Are we concerned about the impact of that rise in rates on the financial market singularly? No. There are many facets to the impact on the markets. The rise in rates certainly doesn’t appear to be pushing interest rates higher broadly across the fixed income markets; it seems to be putting more pressure on risk assets and equity markets. What concerns us the most, frankly, as we look forward — if there were any additional increases at the Fed, as opposed to other central banks continuing to have relatively easy policies — the concern is currency, because if the U.S. dollar, which has been stronger over the last year or so, continues to strengthen, it will in all likelihood put additional pressure on the U.S. economy based on the pressure in terms of relative pricing that happens for companies that are export-oriented. We’ve already seen that pressure — we’ve seen it in their profit and revenue statistics — and so, if it gets worse, it becomes a larger problem.

Last point, in terms of that currency issue is, think about all the borrowers around the world who have done their borrowing in U.S. dollar terms — emerging markets, for the most part. Emerging market debt, in many cases, because of the dollar strength, has been repriced by 5, 10, 20, 30 or more percent. It’s simply this: they owe it in dollars; they generate, if you will, reserves in their own currency, and the debt has been marked up by the strength of the dollar. That represents a serious challenge to those emerging market economies to be able to service their debt appropriately. These are pressures that will continue and the Federal Reserve going off on its own relative to other central banks probably helps to create those pressures.

The views expressed represent the Managers’ assessment of the market environment as of March 2016 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting delawarefunds.com/literature or calling 800 362-7500. Investors should read the prospectuses and the summary prospectuses carefully before investing.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt. Fixed income securities may also be subject to the risk that principal is repaid prior to maturity.

International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Quantitative easing is a government monetary policy used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increased the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

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