If the Dollar’s Run is Almost Done, what are the Implications?

Wednesday, February 22, 2017 |

In my last post, I discussed how the dollar’s bull market might be nearing its end.  Like that run, US stocks have also enjoyed outperformance versus their international counterparts.

Source: Morningstar Direct.  SPY = SPDR S&P 500 ETF .  EFA = iShares MSCI EAFE ETF.  EEM = iShares MSCI Emerging Markets ETF.

This has not always been the case though, as International stocks outperformed US stocks at the start of the 2000s.  Opposite of the chart above, that corresponded with the dollar weakening.

Source: Morningstar Direct

The implication is that international stocks would benefit from a weakening dollar, which makes sense as international stocks are priced back into dollars.  For example, if international stock XYZ is $100 with USD at parity (1 to 1) then in USD that same stock is worth 100.  However, if that same currency can buy 1.20 USD then when you convert the stock value to USD it’s now worth $120.

Further, a rising currency makes capital investment more attractive helping push earnings up.  I have also noted that International stocks have an attractive valuation relative to US stocks as well.

Not all is bad for US stocks though.  They can still rise while USD is depreciating (think 2002 to 2007).  A weaker dollar would also support US exports, helping earnings in those companies who have business abroad.

Ultimately time will tell if/when there is a shift in the dollar.  But it may make sense to start preparing your portfolio accordingly for the end of the dollar bull market.

S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market.  Investors cannot invest directly in an index. International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and political uncertainties, not typically present with domestic investments.

Investing in currencies, FX, foreign exchange involves risk, such as currency fluctuation, economic changes and market risk. Currencies are volatile, speculative, and high risk instruments. An Investor should consider investment objective and risk tolerance and expenses associated with investing. Fluctuating foreign currency rates will impact your investment therefore increase or decrease in value where losses can exceed your initial deposit and may not be suitable for all investors.