In the long run, the US dollar and the stock market show a slight negative correlation, which means that a weaker US dollar will benefit the stock market slightly.
The dollar looks shaky. Some analysts believe that unless the U.S. dollar collapses in some way, a weaker U.S. dollar should benefit the US stock market—although foreign stock markets may benefit more.
On Monday, the Intercontinental Exchange (ICE) U.S. Dollar Index, which tracks changes in the exchange rate of the U.S. dollar against six major international currencies, fell to a two-year low of below 94.00, after the index fell 1.6% in total trading last week.
Prior to this, the ICE dollar index hit an intraday high in more than three years on March 22, reaching a level slightly below 103 points. A day later, the S&P 500 index hit a low point during the worst period of the new coronavirus pandemic. With the weakening of the U.S. dollar, the U.S. stock market rebounded sharply, and the S&P 500 index is currently only about 5% lower than the historical high set on February 21. Earlier this year, the index plummeted 34%.
For investors, the relationship between the dollar exchange rate and the trend of the US stock market may be difficult to accurately grasp. After all, a weaker U.S. dollar is usually seen as good news for the US economy and large multinational companies. These companies have a large part of their revenue from markets outside the US, but most of the costs are incurred in the US. However, the US stock market has performed well in the recent dollar bull market, which reflects the strength of the US economy relative to the rest of the world.
If the weakening of the dollar reflects a major domestic problem in the United States, then this trend is not necessarily beneficial to the stock market.
In the past week, the U.S. dollar and the stock market have both fallen, and the U.S. dollar has not been able to get much hedging boost from the escalation of geopolitical tensions. During the period, the S&P 500 index fell 0.3%, and the Dow Jones Industrial Average fell 0.8%.
But in the long run, the US dollar and the stock market show a slight negative correlation, which means that a weaker US dollar will benefit the stock market slightly. Jeffrey Schulze, an investment strategist at ClearBridge Investments, said that since 1973, the monthly correlation between the trade-weighted broad dollar index and the S&P 500 index is -0.2. However, this negative correlation has recently become tighter. Schultz said that since 2000, this correlation has been -0.35.
At the same time, it is important to remember that the performance of any currency reflects market participants’ views on the prospects of a particular economy relative to other economies.
In an interview with the US financial media MarketWatch, Schultz said: “The weakening of the dollar does not necessarily reflect the weakness of the US economy, but it reflects the strengthening of the global economy on a relative basis.” He said, although this does not mean that the US stock market will definitely be. Facing bad luck, but the performance of the US stock market in the next six months may be worse than other markets around the world.
Compared with Europe, the US stock market may be particularly prone to underperforming. This is because the new crown pneumonia epidemic in Europe seems to be still largely under control. In addition, European politicians finally came together last week and introduced a large-scale spending and rescue plan, which represents an important milestone, and the European Central Bank has been very active in providing monetary stimulus measures. The weight of the euro/dollar in the trade-weighted dollar index is about 19%, while in the past week, the euro/dollar rose 1.8% to a 10-month high above 1.16.
In fact, the euro has risen by 3.6% in July transactions. Although the US and global stock markets closed lower last week, the euro continued to rebound. Paresh Upadhyaya, director of foreign exchange market strategy at Amundi Pioneer, said in an interview that this may be because investors are starting to see the euro from a different perspective and may see it as the next Safe-haven currency.
Gaurav Saroliya, director of macro strategy at Oxford Economics, said in a research report released last Thursday that the negative correlation between the US dollar and non-US stocks is also the US stock market. The reason for the underperformance is that this correlation is stronger than the relationship between the US dollar and the US stock market, as shown in the following figure:
Some economists warned that the U.S. dollar may collapse in a fast and disturbing manner, which will quickly erode its status as the world’s reserve currency and cause shock waves in the financial markets as the United States strives to control the new crown pneumonia epidemic.
Saroria believes that the dollar is unlikely to usher in such a bleak scenario. He pointed out that as the world’s leading reserve currency, the U.S. dollar experienced bear markets in the 1970s, late 1980s, and mid-2000s.
“These events have not destabilized the global market and economy, but have been quite beneficial to growth,” Saroria said. He pointed out that since the 1970s, during most of the era of free floating exchange rates, there has been an inverse relationship between the U.S. dollar and global economic growth, and the period of rapid appreciation of the U.S. dollar poses greater threat to global financial stability than the period of substantial depreciation of the U.S. dollar. . During the most severe period of global market turmoil triggered by the epidemic earlier this year, the performance of the US dollar highlighted its role as a safe haven.
Nicholas Colas, the co-founder of research firm DataTrek Reseach, pointed out that the trade-weighted U.S. dollar index hit the same day that the S&P 500 bottomed out during the 2008-2009 financial crisis and the new crown virus earlier this year. top. He said that on March 9, 2009, the U.S. dollar index closed at 106.01, and it did not hit this level again until 2015; on March 23 this year, the index hit a record high of 126.47, and has since fallen by 5%. the above.
“The weaker U.S. dollar confirms that global investors believe that the worst period of the new crown virus crisis has passed, and it verifies the trend of the stock market rebounding from the March low.” Colas said. “In other words, don’t worry that a weaker U.S. dollar is a warning sign that the U.S. stock market will suddenly fall. History has proved the opposite.