After a first-half fear fest, a new scare story has investors shivering: the Attack of the Greenback. The US dollar is up 9.0% this year against a trade-weighted basket of global currencies and 16.1% since last June. It is flirting with parity against the euro for the first time in 20 years and at 30-year highs against the yen and pound. It all sparks fears a runaway buck will torpedo US firms’ overseas profits and slam Emerging Markets. But the buck is a bogus bogeyman. Dollar doldrums are less about economics and more about pulverized sentiment—a counterintuitively bullish sign for 2022’s back half. Don’t let them spook you.
Two summers ago, a falling dollar triggered currency fears, which I told you then were false. The greenback’s decline wasn’t a harbinger of US weakness. It simply signaled early 2020’s pandemic- and lockdown-driven global rush to dollar safety was waning. From then through yearend, the S&P 500 jumped 9.1%, excluding dividends. It soared another 26.9% in 2021 while US GDP built on late 2020’s surge.
Today’s dollar rise stems largely from America’s far bigger-than-the-rest yield climb, partly from another flight to safety amid 2022’s myriad fears and heavily Fed hike-related. Dollar doomers shrieking that it undercuts US multinationals are right that a strong buck makes exports relatively more expensive for foreign buyers. With roughly 40% of S&P 500 revenue coming from abroad, that may seem scary. This is only part of the globalization equation. Most big multinationals also have vast operations outside America, too. And they source products globally. And those costs now come in now-cheaper foreign currencies, helping offset previously stated dollar headwinds. Also, virtually all big multinational firms hedge against major currency fluctuations. A strong dollar may nick their revenues, but it just isn’t that significant. Besides, lots of analysts—seeing big currency fluctuations—look past them today, citing sales in constant currency terms. They know currency swings are immaterial and fleeting—not fundamental to a business.
And, of course, if currency would impact US firms negatively, by definition it must impact non-US firms positively—another reason to always think globally first and home country second. Major nations’ stock markets are going to go the way the world market goes, whether the US does better or worse than overseas markets.
Don’t just take my word for any of this. History shows stocks have done fine when the buck was this strong—even far stronger. The last time it climbed this high against a trade-weighted basket of major currencies was the late 1990s and early 2000s. Throughout 1998 and 1999, it wiggled around current levels as the S&P soared 51.4%. A bear market struck in 2000, but not because of a strong dollar. That stemmed from the dot-com bubble bursting—as those profitless and often revenue-light firms burned through balance sheet cash while racking up deep losses with no incoming cash to replenish them, leading to so many bankruptcies. It had nothing to do with currencies. The dollar’s climb throughout most of the ensuing bear market was yet another flight to safety—not causal.
Before that, the dollar stayed above today’s levels—as much as 44% above—from May 4, 1981 through January 13, 1987. Stocks didn’t tank—they surged, with the S&P 500 climbing 98.9% over that stretch. If an even stronger dollar didn’t stop a bull market then, why would it forestall recovery now?
More broadly, dollar moves simply don’t dictate stocks’ direction. Last April, I used statistical correlations to show you this. The past year’s dollar strength hasn’t changed much of importance. Over the last two decades, US stocks’ performance against the rest of the developed world has a correlation of -0.15 with the dollar’s moves against the major currency basket. Given 1.0 signals lockstep movement and -1.0 means polar opposite, the relationship is flimsy—certainly not meaningful enough to base portfolio decisions on.
Now, a strong dollar does reduce US investors’ returns on foreign assets and vice-versa. But remember, currencies always trade in pairs. In time, short-term swings even out.
What about claims the dollar’s strength will spark another Asian financial crisis, à la 1997? Wrongheaded! Bears say Emerging Market central banks are stuck between raising rates parallel to the US or letting their currencies plunge. But the 1997 comparison is apples to aardvarks. Back then, many Asian nations defended dollar pegs with massive foreign exchange interventions but eventually discarded them. That sparked instant devaluations, jacking up their dollar-denominated debt costs just as forex reserves ran dry.
Today? Outside of Hong Kong—armed with enormous reserves—the Asian pegs are gone and forex reserves are broadly fine. Reports lament Thailand’s being most depleted so far. But through Q2, their $218 billion in forex was down just -5.5% from 2021’s end! That is a far cry from 1997’s empty EM coffers.
Strong or weak, dollar doom flares anytime broader fears perk—like now. So see currency worries differently. Look to them not for economic hints but instead as sentiment gauges. Today they tell you the Pessimism of Disbelief reigns. As I wrote here last month, that underpins every recovery from big downturns. Its presence today is a sign you should look past the widespread worry to the approaching rebound.
