October 28, 2015

The Mighty U.S. Dollar

2015_10 MSCI weights infographic2

(Click to enlarge)

Since the end of 2007, U.S. stocks have beat their international counterparts by 7.5% annually, and the U.S. share of the MSCI ACWI index grew from 42% to 52%.1 

Not bad for a country that has only 5% of the world’s population.

Of the factors driving U.S. stock dominance, one of the most important has been the muscular U.S. dollar, which has risen by 27% against trading partners over the period. 2

While the appreciating dollar has allowed U.S. consumers and investors to buy foreign assets more cheaply (i.e., low inflation), it has also created a headwind for U.S.-based exporters and multi-nationals who sell overseas. In August, U.S. exports fell to a three-year low.

This has not gone unnoticed by monetary policy makers. In its September 17 statement, the Federal Reserve justified its continued 0-0.25% target range for the federal funds rate by noting, among other things, that “net exports have been soft” and that it expects inflation to remain “near its recent low level in the near term.”

Did the Fed’s September policy statement have much of an impact on the U.S. dollar’s strength? Not yet. Since the Fed’s announcement, the U.S. dollar has traded roughly flat.

  1. Stock performance based on a comparison of the S&P 500 and MSCI ACWI ex-U.S. total return indexes (12/31/07 through 9/30/15).
  2. Bloomberg BBDXY index.