The US dollar has been surging at a historic pace.
This is bad news for US exporters who are seeing their good become more expensive in the international marketplace. In particular, it’s a worry for big multinational companies — like those in the S&P 500 — that have been generating increasing amounts of business overseas.
While the strength in the dollar is certainly a risk, it’s no guarantee of widespread doom for the US economy and US stocks.
Don’t forget, a strong dollar also means imports are cheaper, commodities are cheaper, and overseas vacations for Americans are cheaper.
In a new research note titled “Could USD strength crash the S&P 500 in Q2?” Societe Generale’s Patrick Legland puts it all into context:
Over the past decade, the share of the S&P 500’s foreign sales has increased (see chart). The beginning of the Fed tightening cycle could reinforce dollar appreciation and affect multinational companies’ foreign earnings (via the deterioration of export competitiveness and the negative impact of currency translation). Moreover, US companies must compete in a less dynamic global environment, with China slowing down and Japan and the eurozone recovering at a modest pace. A stronger USD and lower oil prices will increase the purchasing power of the US consumer. But it remains to be seen whether the potential boost in domestic consumption will be sufficient to offset the negative impact from weak foreign earnings and energy sector turmoil.
In short, a strong dollar has its pluses and minuses, and no one can really tell you if it will be a net positive or a net negative.
The immediate impact is better understood only in hindsight. Charles Schwab’s Liz Ann Sonders analysed the historical dollar bull and bear markets and found that a stronger dollar is sort of associated with stronger markets. But BMO Capital’s Brian Belski argues that ultimately there is “almost no correlation” historically.
Ultimately, it seems that when we’re talking about the impact of currencies, we’re talking about somewhat marginal concerns. Like Legland says, there are fundamental economic concerns like “China slowing down and Japan and the eurozone recovering at a modest pace.” And importantly for the US, “it remains to be seen whether the potential boost in domestic consumption will be sufficient to offset the negative impact from weak foreign earnings and energy sector turmoil.”
It remains to be seen.