Strength of the Dollar

There is a scene in National Lampoon’s European Vacation when, as Clark is ‘just getting the hang of this’ driving on the left side of the road thing, he hits an English cyclist. Clark jumps out of the car to help and brings out his wallet. The cyclist, played by actor and founding member of Monty Python, Eric Idle, declares, “Heaven’s no, no need for money.” And with a nod to the epic Monty Python and the Holy Grail, follows up with, “It's just a flesh wound.”

What, you may be asking yourself, does that have to do with this month’s letter? Though you may not be headed on a European vacation this summer, you may have heard the dollar is very strong. It seems like every pundit in the world is talking about the strong dollar, but how many people know what that means?

First of all, yes, the dollar is strong today. As evidenced by this chart, it is stronger against all currencies.

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In simple terms, this means you can buy more Yen, Euros, Rupees, Columbian Pesos, and Yuan with your dollar than they can buy dollars with their local currency. So, it costs more money to buy a dollar, and it costs less money to buy a café latte, hotel room, or croissant in local currencies.

If you think this sounds counter-intuitive compared to what you are seeing on the streets of the United States, you are not alone. You might ask yourself: if the United States economy is uncertain, why is the dollar doing well? Even though it feels uncertain, the U.S. economy is tough and keeps going strong, especially with a lowering of inflation and lower unemployment rates. Because of this, the Federal Reserve won't be making the money supply easier this year. In other words, interest rates don’t appear to be going lower any time soon. If you are an overseas investor with non-U.S. dollars, you are buying dollars to get our bonds with our interest rates and this cycle continues to drive up the value of the dollar.  

The simplest answer - although we have high inflation, our economy is still strong, and our inflation is lower than many other countries. In other words, the U.S. economy is the cleanest dirty shirt.

What about in the 2H of 2024?  

When the dollar strengthens, it can spell trouble for certain stocks. Take big U.S. companies, for example. These days, many of them do business worldwide, so a stronger dollar means their overseas sales don't translate into as many dollars as before. That can crimp their profits and send their stock prices sliding. The reverse is true when the dollar weakens: foreign sales pump up their profits, often giving stocks a lift.

During a recent stretch when the dollar took a dip, from November to December, stocks rode a winning streak to some of their highest levels. This trend isn't new. When the dollar peaked in March2020 as the pandemic shook things up, the stock market started a roaring bull run just as the Fed stepped in to shore up the economy.

But it's not always smooth sailing. Sometimes, even when the dollar moves, stocks barely budge. What is important when looking at the dollar are the reasons driving the moves. If it's fear about the economy weakening, a weaker dollar might not mean better times for stocks. You may remember though, there was a flight to safety for the U.S. dollar in our two most recent recessions.

So, while history might hint at a dollar-stocks tango, nothing's set in stone, and it pays to keep an eye on the bigger picture. Long-term, we at Conscious Wealth Investing are most concerned with sky-high federal debt and decreased revenues in the United States. This mix of spending without income is a precarious situation that we are continuously monitoring.

The way we see it, the most advantageous way out of this situation is with legislation and/or robust economic growth. Perhaps we will have more clarity in November. Until then, to quote Vacation again, "We're all gonna have so much ‘freaking’ fun we'll need plastic surgery to remove our goddamn smiles!"

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