The knee-jerk assumption is often that a strong dollar is bad for the U.S. stock market. History and recent performance highlights the fact that is not necessarily true.
Movements in the U.S. dollar can be measured in different ways and tend to follow cycles. The most recent period of dollar strength began in the third quarter of 2011 and shows no sign of reversing. While the trend makes it seem like a development garnering increased investor notice and media consternation, strong dollar periods are not without precedent. History and recent performance combine to provide insight into potential outcomes for investors, businesses, specific asset classes, and the economy.
This Abbot Downing newsletter looks at the impact on equities, risk management, and hedging when the U.S. dollar is strong. We also take a closer look at dollar cycles from 1970 to the present to learn from the results from those time periods. The dollar’s impact on economic growth is complex, but understanding historical data can help investors move forward through different types of cycles.
- The U.S. dollar’s strength through Spring 2015 stemmed from a host of factors, including falling energy prices, strong fundamental performance by U.S. companies, and the dollar’s psychological “safe haven” status for global investors amidst increasing geopolitical and social tensions.
- While it may have a negative impact on the earnings of U.S. exporters, a strong dollar helps companies with operations largely in the U.S.
- The U.S. dollar can only strengthen when other currencies weaken. If you directly own or expect to receive assets denominated in other currencies, you may want to protect the value by hedging.
- It may appear simplistic, but strong dollar periods coincide with S&P 500 outperformance, while weak dollar periods coincide with U.S. stocks underperforming.
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