Max B. from Nashua, N.H. asks: Hi Mitch, I’ve seen a lot of commentary about the impact of rising interest rates on the stock market, but what about the dollar? Isn’t the strengthening of the dollar also a risk to contend with? Thanks for taking the time.
Mitch’s Response:
Thanks for writing, Max. Much like interest rates over the past few weeks, the U.S. dollar has also been swiftly on the rise (strengthening). The uptick has been fairly sharp, with the nominal broad U.S. dollar index—which measures the dollar against a basket of developed market currencies—up over 6% since mid-July. Looking at the chart of the dollar below, you can see what looks like a ‘v-shaped’ bounce forming over the past few weeks.1
The U.S. Dollar Index (2014 – present)
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The dollar’s strength is arguably being driven by underlying economic strength, which has been putting pressure on U.S. 10-year Treasury bond yields. If global markets see the U.S. economy as strong relative to the rest of the world, and there are expectations that interest rates in the U.S. will remain higher for longer, it makes sense that the dollar would also strengthen.
To your point, there are some risks to a stronger dollar, but they mostly relate to business dealings outside of the U.S. A strengthening U.S. dollar means foreigners get fewer dollars per unit of their local currency, which impacts their ability to spend on U.S. multinationals’ goods and services (which can also mean few imports). A stronger dollar can also impact foreign governments, especially Emerging Markets, which borrow in dollars. Interest payments go up as the dollar strengthens, which can impact domestic finances and the ability to invest. Finally, since commodities like oil and wheat, are largely traded in U.S. dollars, a strong dollar raises prices for many foreign countries, which can crimp economic activity.
On the flip side, a strong dollar generally benefits the most important factor in the entire global economy: U.S. consumers. A strong dollar can keep import prices in check and also provides Americans more purchasing power abroad. What benefits U.S. consumer spending tends to benefit the economy at large.
From an investment standpoint, I would argue that there are too many other factors driving the equity markets for the dollar to have outsized influence. To the extent that a strong dollar affects earnings (particularly for multinationals), individual stocks can feel an impact. But broadly speaking, the stock market has done very well both when the dollar has been strengthening and weakening. There is no significant correlation between the two. A strengthening dollar historically corresponded with one of the best periods for stocks, 1995 – 2000, but also one of the worst, the 2008 bear market. At the same time, the dollar’s weakening period from 2003 – 2006 did not adversely impact the economic expansion and stock market recovery then, just as the dollar’s strengthening did not derail the 2009 – 2022 bull market.
As we watch the next few months unfold, I advise that investors revisit their investment portfolios. Factors, such as volatility, can be very unpredictable, but it is possible to navigate through it.
Our free guide, Helping You Manage Market Volatility4, provides expert insights on managing market volatility, including:
• Market downturns can and will occur—what should you do?
• The key to managing volatility without compromising returns
• Getting assistance when conditions become overwhelming
Plus, more helpful ideas based on our decades of wealth management experience. If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Disclosure
2 Fred Economic Data. October 2, 2023. https://fred.stlouisfed.org/series/DTWEXBGS#
3 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.
4 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.
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