Topline
The U.S. dollar continues to surge against other currencies globally as investors pack into the safe asset and concerns of a global recession intensify—prompting a growing crop of experts to warn the dollar’s strength could spell further doom and gloom for the slumping stock market, as it has proven to do historically.
Key Facts
The Dollar Index, which measures the dollar compared to a weighted average of six other currencies, was up .12% to more than 114 points Wednesday, by far its highest level since 2002.
The index has surged nearly 20% this year, and Morgan Stanley analysts on Monday predicted it will climb another 4% to 118 by the end of 2022—almost matching a 36-year high of nearly 119 from 2002.
The euro, the dollar index’s biggest component, has tumbled 18% against the dollar over the past year and was worth $.96 Wednesday, its lowest level since 2002 just two months after reaching parity with the dollar for the first time in two decades.
The British pound has also started tanking amid concerns of increased government borrowing to help pay for tax cuts in the United Kingdom will only worsen already rampant inflation, falling to an all-time low of $1.035 against the dollar early Monday, though it has recovered slightly since, trading at $1.068 Wednesday, a more than 20% loss in value year-to-date.
The yen has similarly slumped against the dollar this year, shedding about 25% in value to a 24-year low, prompted by the Japanese central bank’s steadfast commitment to low interest rates as other countries pursue more aggressive monetary policy.
The Chinese yuan fell about .5% against the dollar Wednesday to its weakest level since 2008; it’s down about 20% this year.
Contra
While the strong dollar may give Americans stronger purchasing power abroad, it’s bad news for the earnings of multinational firms and thus the stock market. Morgan Stanley chief equity strategist Michael Wilson wrote in a Monday note that a 0.5% decrease in earnings for S&P 500 companies accompanied every 1% increase in the Dollar Index, writing, “The recent move in the U.S. dollar creates an untenable situation for risk assets that historically has ended in a financial or economic crisis, or both.”
Tangent
The dollar has similarly skyrocketed in prior economic downturns, jumping 22% in 2008 amid the Great Recession and 7% in early 2020 as the Covid-19 pandemic ground the global economy to a halt.
Surprising Fact
Even after crashing following Russia’s invasion of Ukraine in February, the ruble is one of the best-performing currencies against the dollar in 2022, gaining nearly 30% in value year-to-date. Many attribute the ruble’s recovery to the Russian government artificially propping up its value by implementing stringent capital controls as the country becomes increasingly isolated from the global economy.
Further Reading
Surging Dollar Is Bad News For Stocks—History Shows Markets Won’t Recover Until Greenback Falls (Forbes)
U.S. Dollar Hits 20-Year High: Here’s What That Means (Forbes)
