Lately, the US dollar has been on a tear, thanks to an improving economy and a Federal Reserve expected to soon normalize loose monetary policy.
A stronger dollar makes exported US goods more expensive to overseas buyers in the global market. Furthermore, money earned by multinational corporations overseas loses value when it gets converted to dollars.
With the economy becoming increasingly globalized, some fear that a stronger dollar is bad news for US stocks.
But the story isn’t that simple.
Charles Schwab’s Liz Ann Sonders identified some benefits of a stronger dollar (verbatim):
- “Lower import prices (e.g., oil and autos) leaves more discretionary spending power
- “Lower commodity prices for those priced in dollars (as the dollar appreciates, commodities become more expensive for overseas buyers, who have to convert their weaker currencies into dollars; curbing global demand)
- “Makes foreign travel cheaper for Americans”
So, there are tradeoffs.
“In general, a stronger dollar is likely to be both an economic and market positive,” Sonders argues.
Regarding stocks, Sonders pointed to historical data provided by FactSet. As you can see, stocks typically do better during dollar bull markets than dollar bear markets.
Then again, it’s also worth noting that stocks, on average, went up during the dollar bear markets too.