When the value of the US dollar rises, US goods become more expensive in overseas markets. General, a weaker local currency is good for economies that are driven by exports and maintain big trade surpluses.
The US dollar has been showing strength in recent weeks. And considering the significant foreign exposure of most big US companies, are we to expect stocks to tumble?
“Conventional wisdom holds that a stronger exchange rate is likely to be a headwind for stocks as US products become less competitive abroad,” RBC Capital Markets’ Jonathan Golub writes in a new note to clients. “Our research suggests this is not the case: (1) the economy and the dollar tend to move in tandem, which means that a stronger economy should result in dollar strength; (2) a rising dollar is supportive of higher multiples, as shown below.”
Higher multiples means that investors are willing to pay a higher premium for stocks during periods of dollar strength.
Charles Schwab’s Liz Ann Sonders has noted that there are also significant economic benefits to having a stronger dollar including lower import prices, lower commodity prices, and cheaper foreign travel for Americans.
“In general, a stronger dollar is likely to be both an economic and market positive,” Sonders said.