The Dollar’s Fortune and Foreign Stocks

Chart of the Week: The Dollar’s Fortune and Foreign Stocks

When the dollar is rising, U.S. stocks tend to lead the way. When the dollar is falling, foreign stocks typically outperform U.S. stocks. (We looked at this last spring.)

It’s not a perfect relationship—nothing ever is when it comes to the investment markets—but they tend to move hand in hand.

Recently, we’ve seen a big reversal in the direction of the greenback. The dollar (measured by an index maintained by the Fed that compares it to a basket of other currencies) rose 11% in the first 10 months of the year before declining 4% since the end of October. That’s a big move in a little over a month.

Chart shows the relationship of the U.S. dollar's relative strength against foreign currencies to the performance of U.S. stocks and foreign stocks.
Note: Chart shows the change in index level for the Nominal Broad U.S. Dollar Index 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) on a daily basis from 6/30/2021 through 12/6/2022. Sources: Federal Reserve Bank of St. Louis, The Vanguard Group, Adviser.

The dollar’s reversal has led to a change in market leadership. Over the first 10 months of the year, U.S. stocks (measured by Vanguard’s Total Stock Market Index fund) fell 19%. That hurts, but not as much as foreign stocks’ 24% decline over that same period (tracked by Vanguard’s Total International Stock Index fund). Since the end of October—when the dollar made its abrupt turn—foreign stocks have outpaced U.S. stocks 14% to 5%.

Will the dollar continue to slide? Can foreign stocks continue to outpace U.S. stocks? No one can say with certainty, but the past month is a reminder of why we believe diversification across the globe can lead to better outcomes over time.


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