Strength of the U.S. Dollar and the Stock Market

Chart of the Week: Does Following the Dollar Make Sense?

With the U.S. dollar trading around a 20-year high, it’s no wonder the greenback is in the news. Will the dollar continue to strengthen or is it set up for a fall?

I don’t have a crystal ball. But it isn’t an idle question for investors trying to figure out when foreign stocks will outperform U.S. stocks again.

Over the past 25 years or so, we’ve seen multiyear cycles of U.S. stocks beating foreign stocks and vice versa. Those cycles of relative performance have coincided with periods when the dollar’s been strengthening (good for U.S. stocks) and weakening (good for foreign stocks). So, if you can get the dollar “right,” you have a good shot at getting the U.S. or foreign stock question correct.

Unfortunately, timing the currency market isn’t any easier than timing the stock market. That’s why we prefer to stay diversified—owning both U.S. and foreign stocks in our portfolios. That way we stand to benefit whichever way the currency (and stock market) winds blow.

Does Following the Dollar Make Sense?
Note: Chart shows the change in index level (rescaled to start at 100) for the Trade Weighted U.S. Dollar Index (4/30/1996 through 1/31/2006) and the Nominal Broad U.S. Dollar Index (1/31/2006 through 5/31/2022) along with the relative performance for hypothetical investments in Vanguard U.S. Total Stock Market Index and Vanguard Total International Stock Index (when the dashed line is rising, the U.S. fund is outperforming the international fund) from 4/30/1996 through 5/31/2022. Sources: Federal Reserve Bank of St. Louis, The Vanguard Group, Adviser Investments.

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