The U.S. dollar has strengthened significantly against the euro and other global currencies. Mitch looks at the impacts this may have on markets and trade.
What a Strong Dollar Means for Markets and the Global Economy
For any readers considering a trip to Europe sometime in the future, now might be as good a time as any to make your plans. For the first time since 2002, the dollar has strengthened so much against the euro that the two currencies are at parity – meaning they are roughly equal in value. One dollar gets you one euro.1
U.S. Dollar to Euro Exchange Rate
Source: Federal Reserve Bank of St. Louis2
This move to parity comes on the heels of the U.S. dollar strengthening by over 15% relative to the euro year-to-date, as seen in the sharp decline on the chart above. The dollar has also been strengthening against a basket of the broad developed market and emerging market currencies, which has come as the Federal Reserve embarks on a relatively aggressive monetary policy tightening campaign. The U.S. economy is also largely seen as strong relative to Europe and the developing world, particularly as China's economy slows in response to restrictions tied to its zero-Covid policies. This relative strength encourages foreign investors to invest in U.S. assets and debt, which generally means using dollars and boosting the greenback in the process.
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U.S. Macro Outlook
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U.S. Dollar Index Against Developed Foreign Economies
Source: Federal Reserve Bank of St. Louis4
In terms of what the stronger dollar means for markets and the global economy, there is no singular answer. A stronger dollar creates winners and losers, and in that sense, a stronger or a weaker dollar is not inherently negative or positive.
Among the winners are U.S. consumers, and also businesses that rely heavily on imports in order to drive domestic sales. Americans can stretch the value of the dollar when traveling overseas and/or buying goods and services from abroad, and businesses that rely on imports may see some input cost relief given the dollar goes further.
On the flip side, multinational corporations that generate considerable revenue from abroad can see foreign sales take a hit in a strengthening dollar environment. In combing through Q2 earnings reports, we saw quite a few mentions of the stronger dollar impacting foreign sales. Microsoft, for instance, generates most of its profits from overseas ($36 billion abroad versus $35 billion domestically last year), and so a stronger dollar can mean a higher cost for foreigners buying Microsoft products. The company reported a $300 million impact from a stronger dollar in the last quarter. To be sure, however, many multinationals never convert foreign profits back to dollars (repatriation), instead using their earnings to pay for production, costs, and investments in the foreign country where the revenue is derived.
Foreign consumers, the U.S. tourism industry, and Emerging Markets countries can also be adversely impacted by a stronger dollar. Since a stronger dollar means foreigners have less spending power in the U.S., some may opt not to visit or may spend less when they're here. That can of course impact hospitality businesses in the US, like hotels, restaurants, and tourist-dependent businesses.
Emerging Markets can also be hindered by a stronger dollar, particularly those countries with high debt-to-GDP ratios and relatively low foreign currency reserves. Since some level of Emerging Market debt is financed in dollars, a stronger dollar means that interest payments are more expensive. That can hurt a country with high debt levels and a non-dynamic economy, particularly those that are commodity-intensive.
Bottom Line for Investors
The bottom line is what a stronger dollar means for equity markets. The answer, fortunately, is that there are too many other factors driving the equity markets for the dollar to have outsized influence.
To the extent a strong dollar affects earnings, individual stocks can feel an impact. But broadly speaking, the stock market has done very well when the dollar was strengthening and weakening, and vice versa. There is no significant correlation between the two. A strengthening dollar historically corresponded with one of the best periods for stocks, 1995 – 2000, but also one of the worst: the 2008 bear market. At the same time, the dollar's weakening period from 2003 – 2006 did not adversely impact the economic expansion and stock market recovery then, just like a strong dollar is not likely to shift the economy or market's direction now.
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This special report was created to help you better prepare your investments for any market changes. It contains some of our key forecasts to consider such as:
U.S. Macro Outlook
What fundamentals are U.S. stock markets pricing in with '22 and '23?
What of U.S. GDP Growth?
Zacks forecasts for the remainder of the year
Zacks rank S&P 500 sector picks
And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
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5 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
5 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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