Dollar Down = Stocks Up
According to Barclays Capital, "since 2003, dollar weakness has gone hand-in-hand with equity rallies." The bank's economists estimate currency depreciation helped to reduce the trade deficit, which added 1.1 percentage points to gross domestic product growth in the first half of 2009 from a year earlier.
From the stock market's perspective, Barclays Capital notes in its U.S. Portfolio Strategy weekly letter that more than 30% of revenues for Standard & Poor's 500 companies come from abroad. Thus, dollar weakness boosts earnings of large, U.S. multinational corporations through increased competitiveness and positive currency translation effects, as foreign revenues are converted into a greater number of shrunken dollars.
It's no surprise that technology, energy, materials and industrial sectors benefit the most from the dollar's decline. Barclays plotted the performance of those groups (inversely) against the Fed's trade-weighted dollar index, and the lines moved in lockstep.
Barclays expects dollar weakness to persist in the months ahead, which would support the cyclical rally through year-end, it says. Bad news for the buck is good news for stocks. Booyah!
That underscores why, for all the angst the dollar's decline has produced, it has failed to upset the stock market...
As long as there is no ready substitute for the dollar, Wall Street can celebrate the currency's steady decline. And U.S. GDP will be boosted by a cheap greenback's spur to exports and deterrent to imports.
Weak Dollar Equals Strong Stocks, For Now