Favorable News for the Stock Market: Dollar is Finally Falling

The 2022 stock market’s recovery is aided by the dollar’s decline from its recent high point.

The U.S. Dollar Index is approximately 2.4% lower than its multidecade high of 104.85, which was hit in the middle of May. This decline is primarily attributable to the fact that investors are a little less frightened about slowing economic growth, reasoning that central banks are not going to get much more aggressive in increasing interest rates to battle inflation. As economic anxiety subsides, global investors are less likely to rush to purchase safe-haven assets such as U.S. Treasury paper, which has led to a decline in dollar demand.

Similarly, rates on U.S. government debt have decreased from their recent peaks. The yield on two-year Treasury notes, for example, has decreased to 2.69 percent from 2.76 percent at the beginning of May, giving foreign investors less incentive to purchase dollars in order to acquire this debt. Declining yields diminish the attractiveness of owning dollars.

All of this is good news for stock investors. The dollar has gained 6.6% so far this year, while the S&P 500 has lost 13%. Since May 12, when the dollar peaked and began to decline, however, the benchmark has increased by over 6 percent.

It’s not only that a weaker dollar improves stock market sentiment in general. When the dollar declines, foreign-currency sales convert to more dollars, resulting in a profit for foreign currency sales companies. When the dollar weakens, a greater proportion of forecast adjustments involve upward earnings revisions, according to data compiled by Morgan Stanley strategists.

Numerous worldwide corporations’ stock values have already benefited. Microsoft (MSFT) stock, for example, has gained a little more than 6 percent since May 12. According to FactSet, over half of the business’s income comes from overseas. The company recently decreased its financial projections for the current quarter, citing fluctuations in foreign exchange. The midpoint of its range of revenue expectations declined by about 1 percent, and the midpoint of its range of per-share earnings forecasts fell by slightly more than 1 percent, so investors have every reason to appreciate the dollar’s decline.

Since May 12, shares of Caterpillar (CAT), which generates almost two-thirds of its sales outside the United States, have increased by 10 percent. Nike (NKE) derives a comparable proportion of sales from international markets, and its stock price has increased by 13 percent.

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All of this is positive for stocks to a certain extent, but the strength of the dollar continues to harm corporate profitability. Tom Essaye, the founder of Sevens Report Research, argued that the currency’s decline “will provide some relief for corporate earnings… but we still need to get the Dollar Index at or below 100 before we can say the currency is no longer a real headwind on earnings.”