Latest Economic Review: Sunpointe Illuminations

The Strong US Dollar: A Double Edged Sword

There is a common theme running through many conversations of parents of college aged “young adults”:  I want to live like them!  So many are living abroad, enjoying what the world has to offer, studying, learning – exploring the world.  I remember going to Europe in college – and spending French Francs at a café (dating myself).  It was 7 Francs to the dollar and a cup of coffee was 4 Francs.  Nice!  Life is good when the dollar is strong, and you are a college kid studying abroad in Paris, Madrid or Munich.  The dollar recently reached parity with the euro for the first time in 20 years. But there is a flip side: while high US interest rates have propelled the dollar higher this year, this is doubled with equity market weakness.  And while it’s true that dollar strength should make imports cheaper for US consumers, the downside is that a strong dollar makes products from U.S. based companies more expensive for global consumers.   Thus, if history is any guide, the equity market may need the dollar to stabilize before going back up.

According to DataTrek, the USD has risen 19% over the past year through late September.  What often happens when the dollar rises like this is multinational corporations are forced to lower profit expectations to account for weaker international currencies. History has shown that the dollar has risen in past periods of economic and market stress—for instance: the Great Recession, when the dollar was up 22% in the second half of 2008, and in the first quarter of 2020 during Covid 19, when the greenback rallied 7% (although that was short lived when rates subsequently fell due to quantitative easing).  During both of those periods, stocks hit lows the same day the dollar peaked relative to major global currencies.    Instability in the foreign-exchange markets has been common during global market dislocations over the past 50 years or so.  As such, we may not see the equity markets rise until the dollar peaks.  Unfortunately, it isn’t clear when that will happen.  Our recommendation is to stay diversified and be ready to rebalance when markets dislocate.