Strong Dollar : Between January and July of 2022, the value of the US Dollar index rose about 12%. But during that same time frame, the SP 500 stock index fell about 20%. While there are a lot of factors that cause stock stocks to rise and fall, a strong dollar appeared to be an important factor during this period. It might seem like a strong dollar should be good for the US. Economy and stock market, but as usual, it’s not that simple.
Understanding how currency values change.
Impact on assets like stocks can help you navigate the markets when the dollar is strong. A strong dollar means the US. Dollar’s value is high relative to other currencies. A number of factors can impact a currency’s strength, but typically it comes down.
To supply and demand. One way the dollar can be strengthened is by tightening the money supply. This is done primarily through the Federal Reserve, pushing interest rates higher. Higher rates make borrowing less attractive and discourages people and businesses from borrowing and spending, which takes money out of circulation. At the same time, tightening monetary policy can also increase demand for dollars.
When the Fed raises the federal funds rate, US. Treasury bond yields tend to rise, making them more attractive to foreign investors. These investors exchange their low yielding currency for US. Dollars to buy US treasuries. Dollar increases its value against the investor’s home currency. For example, in the summer of 2008. It took about $1.6 to buy €1.
On July 1422, the dollar and euro were at parity, which means it took $1 to buy €1. There are other factors that can strengthen the dollar, like global economic and political uncertainty. In 2022, the Russian Ukraine war China’s covered 19 lock downs, and talk of a global recession prompted investors to move into the relative safety of dollars and Treasuries. All these factors played a part in the dollar achieving parity with the euro. However, a strong dollar can hurt US based multinational corporations because it makes US.
Goods and services more expensive overseas, reducing demand. Additionally, earnings made overseas are reduced when converted back to US. Dollars. For example, IBM beat earnings expectations in July 2022, but said the currency exchange. Reduced its revenue by 900 million for the quarter. According to FACT SET, currencies were among the Top three issues discussed in Qtwo 2022 earnings announcements. In fact, currency headwinds can be a problem for the S Amp P 500 more broadly because it is made up of many of the world’s largest companies that do business around the globe. On a year over year basis, every percentage point gain in the dollar results in about a half point hit to earnings on the S and PP 500.
Looking at other asset classes, a strong dollar can also suppress commodity prices because so many commodities are traded in dollars. But just like stocks, there are other factors that affect the prices of commodities. Additionally, the Fed’s rate hikes that can lead to a stronger dollar can cause bond prices to fall as yields rise.
However, when the Fed starts to slow. Or end rate hikes, the bond market typically levels out when it comes to International stocks, foreign companies may benefit from a stronger dollar because it makes their goods and services cheaper for US. Consumers. However, inflation and economic slowdowns abroad could offset these benefits.
If you’re wondering how your portfolio might Fare in the face of a strong dollar, here are a few things to consider us. Based multinational companies that get much of their revenue overseas may be more sensitive to a strong dollar than companies that do more of their business in the US.
