Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Wednesday, 1 October 2014

High Dollar Kills the Market?

23:45 No comments

Today's topic is on whether the stock market will be going down if the dollar remain this high or went even higher.

 I saw a lot of people saying that a higher dollar would kill the US economy and affect the stock market because:
1) it hurt exports
2) it makes US goods and services more expensive
3) there might be deflationary concerns

Below shows 3 charts:
1) S&P 500 10 year returns
2) S&P 500 10 year Total Return
3) The Dollar Index (^DXY)

So I will answer all the doubts as to why I believe that a strong dollar will not hurt the US economy, its recovery and the stock market.


The current dollar level is still far from the highest point in 2006.

i) During the period of 2004 to mid 2006, the dollar remained at range above the current level, and the market continue to climb up until the end of 2008 where the Lehman Brother crisis hit.

ii) Since December 2009, the dollar rose all the way till its peak in June 2010. The stock market followed and peak at April 2010.

iii) Since may 2011, the dollar has been steadily rising till now, so has the stock market, and without a correction.

However, this does not mean that a rising dollar is good to the stock market and a falling dollar is bad for the stock market.

i) From November 2005 to october 2007, the dollar fell from peak to trough, the stock market however during this period rose to its peak.

ii) During March 2009 till December 2009, the dollar fell from peak to near trough, the stock market also over the same period rose by nearly 90%. However, this can be attributed to a bounce back from the 2008 crisis.

Through the technicals, it is shown that the dollar has no relationship on how the stock market will perform.


1) A strong dollar will not hurt economic growth, instead, it would more likely improve economic growth. US has been a major importer of goods from abroad. A stronger dollar would only make imports cheaper, which benefits consumers and boost consumptions.  Companies would also face lower cost of raw materials, hence improving profit margins.

2) The US is a major consumption-based or consumption-driven economy, especially domestic consumption. A rising dollar will not hurt domestic consumption because things are going to be cheaper thanks to a stronger dollar and they are at least not as affected as countries trading with the US.

Saying that I am not going to eat at Mcdonalds because a rising dollar will make my burger more expensive in my view is ridiculous. Stronger dollar means each of my dollar is going to get me more stuff, I am going to be able to buy more stuff than before.

3) Deflationary concern is one of the least concern I have regarding the US market and economy right now. With the Fed keeping rates at record low and a possible action of QE anything things looks like they are going in the wrong direction, I am least afraid of a deflation. I am instead more worry about inflation that will be coming over the next 5 to 10 years (Will be writing another article on this).

4) A strong currency mostly affect only those export determinant countries like China, Japan and South Korea. These countries when hit with a higher currency value (Higher Yuan, Yen or Won) will result in their exporting products becoming more expansive and hence leads to a slower growth. However in the case of US, it is the opposite, hence a stronger dollar would make imports cheaper, reduce inflation, improve companies' margins - although it would make the reported earnings look bad because of USD reporting.

The way I see it, the dollar will not affect the market's current upward momentum. The market current sell-off because of a high dollar is a good buying opportunity.
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