How U.S. Stock Prices Correlate to the Value of the U.S. Dollar (2024)

As the value of the U.S. dollar rises globally, the U.S. stock indexes tend to rise along with it.

Over the last 20 years, the rise in the value of the U.S. dollar has had a slight positive correlation to the movement of the S&P 500 Index. That is, about 40% of the time, the S&P goes up when the dollar's value rises.

That may be an interesting statistic, but it's more important to determine how and why the investments you choose can be affected by the rise or fall of the U.S. dollar.

Key Takeaways

  • Stock indexes tend to rise along with an increase in the value of the U.S. dollar.
  • More important to an investor is the impact of the dollar's rise or fall on the individual stocks they own.
  • Companies that rely on imports thrive when the U.S. dollar is strong.
  • Companies that sell their products globally thrive when the dollar is weak.

How U.S. Dollar Value Moves Stock Prices

The U.S. dollar, or any country's currency, can become more valuable in relation to other currencies in only two ways. It grows in value when there is increased global demand for the currency. And, it grows in value when the nation's central bank reduces the amount of the currency that is available.

It's practically inevitable that an increase in the U.S. dollar's value will raise the value of American stock indexes since U.S. dollars are needed to purchase stocks.

But the effect of a significant appreciation or depreciation in the value of the U.S. dollar on an investor's U.S-based portfolio is very much a function of the portfolio's contents. Your portfolio might be worth less than before, more than before, or about the same as before. It depends on what kinds of stocks are in your portfolio.

U.S. Dollar Stock Correlation Scenarios

The following three examples illustrate the different potential effects of a declining dollar on an investor's portfolio:

The Worst-Case Scenario

Your portfolio is made up of shares that rely heavily on imported raw materials, energy, or commodities to make money.

A substantial portion of the U.S. manufacturing sector depends on imported raw materials to create finished goods. When the U.S. dollar declines in value, the purchasing power of the U.S. dollar declines. It will cost manufacturers more to buy their materials, which puts pressure on their profit margins and, ultimately, their bottom lines.

Companies in your portfolio that don't properly hedge against their reliance on the price of imported goods or the effects of a declining dollar can expose you to foreign exchange risk.

For example, a company that makes baseball bats using imported wood will need to pay more U.S dollars for the wood. The company will have to decide whether it will keep its prices the same and make less money per unit sold or raise its prices and risk losing customers.

The Likely Scenario

Your portfolio is made up of a diverse collection of companies and is not overweight in any one economic sector. You have also diversified internationally and hold stock in companies that operate around the world, selling to many different markets.

In this situation, a declining dollar will have both positive and negative effects on your portfolio.

The extent to which the companies you own depend on a high or low U.S. dollar to make money will be a factor in their stock performance, which is why diversification is crucial. The positive and negative effects of the change in the dollar should balance out.

The Best-Case Scenario

Your portfolio is made up of companies that export U.S. manufactured goods around the world.

Companies that rely substantially on foreign revenue and international exports stand to do very well if the U.S. dollar depreciates in value because they get more U.S. dollars when they convert the foreign cash their products bring in.

These companies sell products around the globe. A low dollar also makes high-quality American goods more competitive in international markets.

The Bottom Line

The values of American stocks, especially those that are included in market indexes, tend to increase along with the demand for U.S. dollars. In other words, they have a positive correlation.

One possible explanation for this relationship is foreign investment. As more investors place their money in U.S. equities, they are required to first buy U.S. dollars to purchase American stocks, causing the indexes to increase in value.

However, the important factor is the makeup of your personal portfolio. If your choices are diversified, your money will be protected from foreign exchange risk, among other risks.

How U.S. Stock Prices Correlate to the Value of the U.S. Dollar (2024)

FAQs

How US stock prices correlate to the value of the US dollar? ›

Stock indexes tend to rise along with an increase in the value of the U.S. dollar. More important to an investor is the impact of the dollar's rise or fall on the individual stocks they own. Companies that rely on imports thrive when the U.S. dollar is strong.

What is the relationship between the dollar and the stock market? ›

This means that when the value of the dollar strengthens, stock prices may decline, and vice versa. One reason for this inverse relationship is that a stronger dollar can make U.S. exports more expensive, potentially affecting the earnings of multinational companies.

What is the relationship between the currency and the stock market? ›

In theory, a growing stock market signals that an economy is expanding, leading to increased demand for a currency from foreign investors. These investors would need to exchange their native currency for the currency of the country they're investing in to purchase stocks and other assets.

How does the stock market relate to the economy? ›

The stock market is often a sentiment indicator that can impact gross domestic product (GDP) either negatively or positively. In a bull market—stock prices are rising—consumers and companies have more wealth and confidence—leading to more spending and higher GDP.

What determines the value of the U.S. dollar? ›

There are six fundamental factors that have an influence on the US dollar exchange rate. These include things such as economic performance, supply and demand of currency, inflation and geopolitical factors.

What mostly determines the value of the U.S. dollar? ›

When demand for the dollar increases then so does its value. Conversely, if the demand decreases, so does the value. The demand for the dollar increases when international parties, such as foreign citizens, foreign central banks, or foreign financial institutions demand more dollars.

What happens to stocks when the U.S. dollar goes up? ›

The dollar and the S&P 500 have often had a negative correlation in the past three years, meaning that when the dollar rises, stocks fall. From April to October 2022, the dollar surged and the S&P 500 plummeted. It happened again from late July to late October of last year.

Is the U.S. dollar backed by the stock market? ›

The U.S. dollar is backed by deep, liquid and regulated financial markets. Perhaps a key reason the U.S. dollar has been the dominant currency globally is the strength and stability of the U.S. economy, as well as the deep and liquid financial markets the U.S. offers.

What does a strong U.S. dollar mean for the stock market? ›

The Bottom Line

Multinational companies are vulnerable to the effects of currency fluctuations on the spending power of their customers abroad. A historically strong U.S. dollar may cause stock investors to look into companies that make their money mostly or entirely in their home countries.

What is the correlation between the S&P 500 and the dollar? ›

The average dollar/S&P 500 correlation over the last 15 years is -0.26, for an r-squared of just 6.8 percent.

Is it better to trade stocks or currency? ›

If you are interested in a fast-paced environment, forex provides ample opportunities for short-term traders – such as day traders, scalp traders or swing traders. If you're looking to take advantage of short to mid-term trends, or less volatility, the stock market could be for you.

Who benefits most from the stock market? ›

But the booming markets are likely to benefit White families more than families from other racial and ethnic groups. That's because White families are the most likely to own publicly traded stocks, either directly or indirectly – for example, through a retirement account or mutual fund.

Does the stock market really reflect the economy? ›

The key point to remember is that the stock market is not the economy, but instead, a leading indicator of where investors think the economy will go.

Why does the stock market not reflect the economy? ›

While the two are interrelated, they have key differences. Time period. Note that economic measures relate to the past and can lead up closely to the present. Meanwhile, the stock market is thought to be forward-looking, meaning some investors believe it can anticipate economic conditions that may occur in the future.

Does the U.S. dollar affect the stock market? ›

The dollar and the S&P 500 have often had a negative correlation in the past three years, meaning that when the dollar rises, stocks fall. From April to October 2022, the dollar surged and the S&P 500 plummeted. It happened again from late July to late October of last year.

Is a strong dollar good for US stocks? ›

Besides hurting earnings, a super-strong dollar can also hurt prices of US stocks and bonds by making them more expensive for big non-US institutional investors.

Why is a weak dollar good for stocks? ›

A weaker dollar means some foreign consumers and governments get more dollars for every unit of their home currency, which means they can afford to buy more goods and services from U.S. companies.

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