There's been a fair amount of discussion regarding the recently demonstrated weakness in the US Dollar (USD). But like many financial metrics, taking a broader perspective is always more helpful. Over the past decade, the USD has gained around 7% (see Fig. 2). During the period immediately after the Federal Reserve began its massive rate hike cycle, the USD was up nearly 18% from its March 2015 value. Just before the pandemic in late 2018, the USD had lost nearly 9% of its value compared to its 2015 level.
Periods of USD weakness should be good for U.S. multinationals, as their goods become less expensive to foreign markets which make up a significant portion of their sales. However in Fig. 2, the inverse of this relationship dynamic is clearly demonstrated during the early part of the decade from 2005 to 2015. In a few short years, as the USD declined around 15%. Non-U.S. equity values soared around 80% over that same period in a blatant rebuke of a weaker USD. Meanwhile, U.S. equities lagged far behind in their total return (similar to what is being seen today).
After the Great Financial Crisis (GFC, 2008-2009) with the USD having recovered some of its value, non-U.S. equities rebounded even much stronger than their U.S. counterparts. Eventually, towards the end of this decade, the prolonged weakness in the USD provided some wind beneath the wings to U.S. equities. However, in another demonstration of an inverted relationship, as the USD gained as much as 20% relative to its value a decade prior, U.S. equities soared far above non-U.S. stock markets.
The key takeaway here is that there is no clear cut relationship between a weak or strong USD. The impact of such relative value changes must be analyzed alongside other financial metrics and geopolitical pressures. Today, with uncertainty about the future of the U.S. economy, inflation, and global trade, recent USD weakness may be only the tip of the iceberg in a sea change of global supply chains.
Fig. 1
Fig. 2
