The Dollar Keeps Hitting New Highs. The Stock Market Doesn’t Like It.

The stock market is hoping that the dollar turns from a headwind to a tailwind.

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As the dollar keeps hitting new highs—and the stock market takes a dive—stock investors hope the greenback’s ascent will end soon. 

The U.S. Dollar Index (DXY), which measures the dollar against a basket of currencies, has gained almost 15% this year. Wednesday, it hit its highest level in just over 20 years. It has hit 16 new highs since 2002 this year. 

Driving the buck’s gain this year has been a stronger U.S. economy relative to other nations. The U.S. may—or may not—be in a technical recession, but economies overseas have performed much worse.

The European Union is confronting soaring natural-gas prices that are destroying consumer demand, and China’s economy has been hurt by Covid-19-related lockdowns. These developments are sending global investors into the safety of the U.S. dollar. 

Meanwhile, the S&P 500 is down about 18% from its early January all-time high. That trend has remained firmly in place in the past few weeks. Since mid August, the dollar has resumed its gain after a brief pause, while the stock market has continued lower after a summer rally.

The problem is that, when U.S.-based companies that generate sales from overseas translate the revenue back into dollars, they report fewer sales dollars when the buck has risen. That makes the dollar a pressure point on U.S. corporate profits. 

To be sure, the dollar has been only one factor driving the stock market lower. Other forces drag earnings lower, too, such rising interest rates, which are meant to squelch high inflation by reducing economic demand. Higher rates on longer-dated bonds also make future profits less valuable. That lowers stock valuations, or the multiple the market places on near-term earnings expectations. 

But specific examples paint a better picture of the damage the dollar has done to U.S. stocks. Match Group (MTCH), for example, saw its stock drop 18% the day after its earnings report, which revealed a profit miss versus expectations, driven by a stronger dollar. The stock is now even lower than its close that day. 

Now, the stock market is hoping that the dollar turns from a headwind to a tailwind. By this time next year, the dollar could be lower on a year over year basis, which could serve as a boon to earnings growth.  

“A weaker dollar could be an important catalyst to establish a strong bounce [in stocks] at the very least,” wrote Quincy Krosby, chief global strategist at LPL Financial.

That is the hope, but it is anything but guaranteed. With the Federal Reserve still raising rates aggressively for a little while longer, it is reducing the supply of dollars, noted David Rosenberg of Ronseberg Research in a report to clients. 

There could be some more dollar gains—and stock market pain—before the global economic trouble subsides. 

Write to Jacob Sonenshine at