How the U.S. Dollar impacts the stock market


From 1973-present, the long term correlation between the U.S. dollar and stock market is weakly positive at best. However, there are specific times when the USD has a stronger correlation with the S&P 500.

A big bear market for the U.S. dollar is bullish for the U.S. stock market.

Otherwise, the U.S. dollar’s and stock market’s long term correlation is mostly random.

  1. The stock market can go up for down when the USD is in a big bull market. (e.g. 1980 – 1985),
  2. The stock market can go up or down when the USD is swinging sideways in a big range. (e.g. 1990-1995, 2008-2014).

Here’s a chart of the U.S. Dollar Index.

The S&P 500 rallied sharply from 1985 – 1990 and 2002-2007.


Here’s why a falling U.S. dollar is bullish for stocks.

The economy

There is almost no correlation between the U.S. economy and the U.S. dollar in the long run.

Revenues and earnings

The U.S. stock market follows the U.S. economy and corporate earnings over the long run. We’ve already established that the U.S. economy has almost no impact on the U.S. Dollar.
However, the U.S. dollar does impact U.S. corporate revenues and earnings. A year-over-year falling USD has 2 effects on U.S. corporate revenues.

  1. Foreigners are more likely to buy products from U.S. companies. The USD is cheaper in their own currency, so U.S. products are cheaper.
  2. When U.S. companies bring their foreign revenues/earnings back to the U.S., they convert that into a depreciating currency (the USD). So in USD terms, it seems as if their sales/revenues are increasing.

*It’s the year-over-year change in USD that impacts corporate revenue/earnings growth. Corporate revenue & earnings growth are reported as year-over-year changes, so it only makes sense to use the USD’s year-over-year change. Hence, there is a lag between the U.S. dollar’s decline and an increase in revenues/earnings.
*Keep in mind that a 1% decrease in the USD does not equal a 1% increase in U.S. corporate earnings. U.S. companies also incur expenses overseas, which are more expensive due to the depreciating USD. U.S. companies hire workers overseas, source inputs/materials from overseas, etc.
Today, more than 1/3 of the S&P 500’s corporate revenues come from outside the U.S. The USD’s impact is particularly notable in industries such as tech, where tech giants like Facebook have more than 2/3’s of their revenue come from outside the U.S.
As globalization continues, the impact of foreign nations and the USD on U.S. corporate revenues/earnings will increase.

Focus on the U.S. Dollar Index and not on individual currencies

A single currency pair’s bull/bear market (e.g. Euro, Yen, Canadian Dollar) will not impact U.S. corporate revenues/earnings in a meaningful way. Currency pairs fluctuate wildly from country to country in the short and medium term due to political and financial concerns. But as long as there are no global macro forces at play (e.g. global deflation), fluctuations between currencies tend to cancel each other out. This results in the USD swinging sideways for a long time.

Hence, it’s important to focus on the U.S. Dollar Index’s trend. Is it in a decisive bear market? If so, that’s a significant medium-long term bullish factor for the U.S. stock market.

2 comments add yours

  1. The most recent government shutdown ended on Oct. 1-17, 2013. During that shutdown the Nasdaq fell 4.4% over six sessions and then rebounded 5% over the next six sessions.

    • Yes but taken as a whole, the stock market’s reaction to government shutdowns is almost random.

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