What will happen to US stocks if the dollar strengthens

Questions like these are never easy to answer because there are so many variables in play. But if we are going to try and answer these questions, we must simplify the question by saying things like holding other variables constant (which may be in some cases impossible but necessary to come to any conclusion). In other words, the answer we come up with may or may not be true depending on a whole bunch of other things going on in the economy at that particular time. Regardless, it’s a good exercise to help you get critically thinking and questioning things on your own, and shows you how to do similar studies on your own. Having said all this, it’s time to get started answering the question, what will happen to the US Stock Market if or when the dollar rebounds to levels before this global financial recession.

First, let’s briefly discuss what happened when the dollar began it’s tumble. The US government began taking on additional debt to foreign governments such as China and Japan around 2002 to help fund military wars in Iraq and Afghanistan. The value of the dollar slowly dropped over 40% against the Euro over the following 6 years as deficit spending increased in the US. Then the sub-prime mortgage crisis in the US compounded the problem, and US banking real estate assets and stocks took additional hits. From it’s high against the Euro near $1.20, the dollar will now only buy around .7 Euros. The same is true for the USD against most other major currencies, most not to the extent of the Euro.

USD to EUR

Above: Value of USD against Euro from 1999 to 2009.

So, the recession hit and the dollar went to it’s lowest price against the Euro in it’s 9 year history. The stock market lost tremendous value as investors sought a safe haven from the turbulent and volatile stock market. Once things stabilized, stocks were deemed severely undervalued, to domestic and international investors alike. And international investors could afford to buy much more in the form of US stocks or equities, because their foreign currency bought more US dollars. Moreover, foreign investors holding US dollars wanted to hedge against further dollar declines and so they began purchasing gold, oil, and stocks in the US. This helped catapult the US stock market from a low near 6,000 points in March, to our current point around 10,500.

Which leads us back to our question, what will happen to stocks if the Dollar rebounds? Individuals that are interested in making a profit through online forex trading, it is important to research in depth the currency pairs to help predict each unit’s strength. One would think foreign investors would react just the opposite way. As the dollar strengthens, stocks, gold and oil will become more expensive and people will want to sell, instead of buy. In essence, the market will retract and lose the benefits once in place when everything was so “cheap” in foreign currency to purchase. By the time this happens economic recovery should occur (likely the cause of the dollar strengthening) making the point moot, meaning the negative impact of foreign investors selling would be offset by others more willing to buy stocks and such.