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Chart of the Week
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March 30, 2015

Who’s afraid of the big bad buck?
DXY Dollar Index: Dec 1970 – March 2015

chart

Source: Bloomberg, as of 3/23/2015. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom Line:

  • A strong currency has long been viewed as a sign of economic power.
  • Yet nowadays the prevailing narrative around the rising dollar seems to be that the US economy and stock market have more to lose than gain from the greenback's surge in value.
  • Certainly adjustments are being made to economic expectations, earnings forecasts and corporate tactics/operations.  
  • But is the current pessimism overdone? A look back at history would suggest that could be the case.
  • The dollar has experienced two periods of significant strength relative to the currencies of major trading partners in the past 45 years.
  • Both those periods produced strong economic and market results. During the rising US$ period in the early 1980s, the S&P 500 generated an average annual total return of 16% and real (inflation-adjusted) GDP growth averaged +3.4%.
  • And during the period spanning the late 1990s and early 2000s, the S&P 500 generated an average annual total return of 12.2% and real GDP growth averaged +3.6%.
  • Of course, the future never looks exactly like the past; the makeup of the S&P 500 and dynamics of the economy are different now.  And the US$ was just one of many other factors influencing results in those periods.
  • And that's exactly the point that should be acknowledged when considering the rising dollar today. Its impact will vary by company, industry, sector and even by country—the US$ has not gained equally against all currencies.
  • It will also set in motion unexpected opportunities and consequences—and how individual companies respond to these new challenges will help determine future winners and losers in the quest for market share and profitability.

The chart:

  • The chart shows the DXY Dollar Index from Dec 1970 through March 23, 2015.
  • For the purposes of this analysis we subjectively divided the chart into several periods defined as follows: two periods of the dollar rising rapidly to very strong positions; three periods of a declining dollar; two periods where it was range bound, but somewhat weak; and the current period where it has risen sharply, but to an average level and still 20% below its most recent peak in 2002.
  • During the big run between June 1980 and February 1985, the DXY Index went from a low of 85.2 to an all-time high of 160.4. During the next period of dollar dominance from December 1995 through January 2002, the DXY Index went from a low of 84.7 to a high of 120.2. S&P 500 and GDP statistics for those periods are provided in the text above.
  • The chart also shows periods when the dollar was in general and even sharp decline, defined  here as December 1970 to June 1980, February 1985 to December 1987 and January 2002 to March 2008. These periods saw respective S&P 500 average annual returns of 2.3%, 15.6% and 4.5%. Real GDP growth averaged 2.9%, 3.9% and 2.6% respectively.
  • The two "range-bound" periods are defined as December 1987 to December 1995 and March 2008 through December 2013. Both could be considered weak dollar periods, especially the latter. These periods saw respective S&P 500 average annual returns of 15.6% and 8.4%. Real GDP growth averaged 2.8% and 1.2% respectively.
  • While the recent period of a rising dollar is short for comparison purposes—beginning Dec 2013—the respective S&P 500 and GDP stats are 14.2% and 2.4%.

Definitions:

The DXY Dollar Index measures the value of the U.S. dollar relative to the exchange rates of six major world currencies (the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc) which represent a majority of its most significant trading partners.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

Real gross domestic product (GDP) is a nation's total output of goods and services in constant dollar, or inflation-adjusted terms.


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