{"id":9457,"date":"2023-05-08T08:50:00","date_gmt":"2023-05-08T08:50:00","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=9457"},"modified":"2023-05-05T02:59:34","modified_gmt":"2023-05-05T02:59:34","slug":"how-does-a-weakening-dollar-impact-stocks","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/how-does-a-weakening-dollar-impact-stocks\/","title":{"rendered":"How Does a Weakening Dollar Impact Stocks?"},"content":{"rendered":"\n

The U.S. dollar has been sliding for the last several months, posting its weakest start to a year since 2018. Headlines suggest the \u201cair coming out of the dollar\u201d is bad news for investors and an ominous sign for the U.S. economy. But I\u2019d encourage investors to zoom out and think about the relative strength\/weakness of the U.S. dollar over the past few years, not the past few months.1<\/sup><\/p>\n\n\n\n

Looking back just two years, many will recall that 2021 and 2022 were very strong years for the U.S. dollar. A country\u2019s currency tends to strengthen when its economic prospects are strong relative to other countries (2021), and\/or when interest rates are going up (2022). The U.S. led most of the world in economic re-opening in 2021, and the Federal Reserve was ahead of other central banks in raising rates aggressively in 2022 to combat inflation. The dollar\u2019s strength over these periods made sense, sending the greenback to multi-decade highs against the euro, yen, and other currencies.<\/p>\n\n\n\n

Fast-forward to the present day, and the economic growth and interest rate setup have shifted. The Federal Reserve appears poised to pause its rate-hike campaign sometime this summer, while other global central banks continue to raise rates. From an economic growth perspective, the U.S. economy is expected to lag Europe, China, and other Emerging Markets this year, with many investors forecasting a U.S. recession by the end of the year. Stress in the U.S. banking sector has only added to concerns about U.S. growth, and another showdown over the debt ceiling likely isn\u2019t helping matters, either.<\/p>\n\n\n\n

Taken together, these factors have all translated into a weaker dollar since last October:<\/p>\n\n\n\n

The U.S. Dollar Strengthened Considerably in 2021 and 2022, But is Retreating Today<\/strong><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/p>\n\n\n\n

Should investors be concerned about a slipping dollar? From an equity markets perspective, history suggests the answer is not a straightforward yes or no. The chart below shows the nominal broad U.S. dollar index for the last 15 years. The red arrows I\u2019ve placed on the chart indicate periods when the U.S. dollar weakened over a long stretch of time, basically from late 2009 \u2013 2011, 2017, 2020 \u2013 2021, and year-to-date 2023. During all these periods, stocks performed quite well.<\/p>\n\n\n\n

The Stock Market Has Rallied During Previous U.S. Dollar Weakening Periods<\/strong><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/p>\n\n\n\n

To be clear, I am not arguing that a weaker dollar is inherently good for stocks. My point is rather to show that stocks can perform well during periods when the U.S. dollar is strengthening or weakening, which is why the market implications are not straightforward bullish or bearish. Market performance depends on too many other factors.<\/p>\n\n\n\n

There are some economic implications of a weaker dollar worth mentioning, however. A weaker dollar means some foreign consumers and governments get more dollars for every unit of their home currency, which means they can afford to buy more goods and services from U.S. companies. Additionally, when profits generated in a foreign currency get translated back into a weaker U.S. dollar, it means earnings get a boost \u2013 also a positive.<\/p>\n\n\n\n

The global economy tends to benefit from a weaker dollar as well. A weaker dollar can boost global trade for the reasons cited above, and foreign companies and governments with dollar debt (especially Emerging Markets) experience a lower cost of servicing and repaying their debt, which can help remove a headwind to growth.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

A strengthening dollar historically corresponded with one of the best periods for stocks, 1995 \u2013 2000, but also one of the worst: the 2008 bear market. At the same time, the dollar\u2019s weakening period from 2003 \u2013 2006 did not adversely impact the economic expansion and stock market recovery, nor did it derail the economic and market recovery following the 2008 Global Financial Crisis or the 2020 Covid-19 pandemic.<\/p>\n\n\n\n

Broadly speaking, the stock market has done very well when the dollar was strengthening and weakening, and vice versa. There is no significant correlation between the two, which means the relative strength or weakness of the dollar is not a reliable indicator for investors. In other words, even if we knew where the dollar was headed in the future, it would not offer great help in measuring the strength of the U.S. or global economy, and it certainly would not be a powerful forecasting tool for the direction of stocks.<\/p>\n","protected":false},"excerpt":{"rendered":"

Headlines suggest the weakening dollar is bad for investors, but there is no direct link between the dollar’s strength and the stock market.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9457","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9457","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9457"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9457\/revisions"}],"predecessor-version":[{"id":9461,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9457\/revisions\/9461"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9457"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9457"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9457"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}