The U.S. dollar receives far less attention from equity investors than do other economic policies like the Federal funds rate, the 10-year Treasury yield, monetary growth, or the degree of fiscal deficit spending. Unlike the funds rate or deficit spending, the dollar is not directly controlled by either the Federal Reserve nor by Congress and the White House. Also dissimilar from the 10-year Treasury yield, the Funds rate, or government tax and spending initiatives, movements in the U.S. dollar don’t often directly significantly impact most Americans. Sure, citizens planning a trip abroad may periodically check on the dollar’s value and companies who sell to international markets certainly keep a close eye on the greenback. But for most, consumers and businesses alike are much more attuned to changes in interest rates, bond yields, and fiscal tax or spend policies than they are to dollar movements.
Despite being a bit more obscure and often out of mind, the U.S. currency can pack a powerful economic punch. Significant U.S. dollar weakness substantially improves the competitive position of domestic companies while it redirects the share of world spending toward U.S. products. Similarly, a rising U.S. dollar is a potent contractionary force causing commodity prices to decline, inflationary pressures to ease, and because it redirects spending away from the U.S. economy, can significantly slow real GDP growth.
While equity investors obsess over interest rate movements, changes in the tax code, and oscillations in bond yields, far fewer focus much on changes in the U.S. dollar except for its direct impact on the price of foreign stock markets. In reality, though, movements in the U.S. dollar have historically played a critical role in almost every significant stock market decline since at least 2000.
