When the value of the dollar rises, American goods become more expensive in foreign markets. On the other hand, the weak national currency is positive for the economy, as exports become more competitive, and that support the balance of trade. But this axiom is not always true.
In recent weeks, the American currency shows a striking effect. And given the significant impact of foreign currencies in most major American companies, it is possible to expect falling of the stock market?
“Conventional wisdom holds that a stronger exchange rate is likely to put pressure on the stock, as American goods less competitive abroad – says Jonathan Golub of RBC Capital Markets. – Our research shows that this is not true: the economy and the dollar tend to move in tandem. This means that a strong economy should lead to a strengthening of the dollar, rising dollar is favorable for large multipliers. “
Higher multiples mean that investors are willing to pay a higher premium for the shares in periods of rising dollar.
Dynamics of S & P500 index and the dollar
Liz Ann Sonders Charles Schwab noted that there are also significant economic benefits due to the strengthening of the dollar, including due to low import prices, lower commodity prices and cheaper to travel abroad for Americans.
“In general, the strengthening of the dollar is likely to be positive for both the market and the economy”, – said Saunders.
The real strength of the dollar
Nevertheless, for each of these currencies are typical factors that cause weakening. Yen is the epitome of financial suicide, according to the authors zerohedge.com, as the government steps Abe their artificially weaken the yen.
Pound was under pressure due to the independence referendum in Scotland, as well as the constant expectation of changes in interest rates. As for the euro, its decline was due to the introduction of negative interest rates on deposits. European authorities expect that this measure will help to achieve recovery in the euro area, while the decline, if it is to grow unchecked, threaten the stability of European banks.
Dynamics of the dollar in tandem with other currencies
These factors are currently explained by the “strength” of the dollar. Economy of the USA, which is currently still can not fully recover from the 2008 crisis, even according to official figures, still looks weak. According to the new officials estimated GDP growth in the United States in 2014 will amount to 2.0-2.2%. In 2015-2016. growth rate of 2.6-3.0% and 2.6-2.9%.
In this case, now there is a risk of any outflow of investors around the world in dollar-denominated assets. Central banks are likely to have time to react. The recipe to avoid this, it is quite obvious: you just need to give more dollars. This can easily be done by extending the currency swaps between central banks and through the coordination of foreign exchange intervention, rather than using the new rounds of good old QE.
But even their reaction still lead to an increase in the dollar, and hence could benefit and market shares.
While the market seems to suggest that the strength of the dollar lies in the less definite reasons for pushing down the value of other commodity assets and the dollar. However, the relationship between the dollar and other currencies and bond yields need to be monitored closely, since the change in capital flows between them can be a sign of something much more serious.