Why Is Dollar High When Stock Market Is Low?

While the stock market and the dollar often have an inverse relationship (meaning that in general, when one is high the other is low), the relationship is not necessarily causal (meaning that a low stock market does not necessarily raise the price of the dollar, or vice versa). There are a number of reasons why the inverse relationship is often observed, however.

Safety

When the stock market falls, many investors pull money out of stocks and buy safer investments. The U.S. dollar is one of the safest currencies in the world, hence, many investors buy dollars when the stock market falls, which is what happened during the 2008 financial crisis.

Loans

When firms borrow money, the loan is generally used to expand production capacity by buying new machinery or space and investing in new projects. A high dollar means that loans in dollars are comparatively expensive. Expensive loans means less investing, and lower investment rates means a lower stock market.

Exports

Looking at the issue from the other side, a low dollar can be a boost for the stock market because low dollars make United States imports to other countries cheaper in foreign currency. Hence, export-oriented United States companies often see a rise in their profits, which raises their stock prices and can have an aggregate positive effect on the stock market.

Debates

Debate abounds about the dollar and stock market relationship, especially considering data that shows that a strong dollar supports a strong stock market. Jeff Miller, author of the market blog A Dash of Insight, cites two leading market analysts with opposing views on the subject, especially with regard to data since the 2008 financial crisis and what a post-recession low dollar augurs. David Merkel cites pre-recession data and believes a strong dollar is necessary for long-term financial health, and that the policies necessary to strengthen the dollar (raising interest rates, for example) would worsen the recession, but clean out only weak businesses, helping the economy in the long run. Bob McTeer assumes that a low dollar leads to higher exports and therefore a higher stock market, but for political reasons cautions against policies that intentionally devalue the dollar. Writing for "The New York Times," Paul Krugman notes that the debate and the factors involved are considerably more complicated than most observers acknowledge, but that the simplest way to raise U.S. production (and if production rises, the stock market rises) would be to lower the dollar.

Stock Market Factors

The stock market is influenced by a myriad of factors, and is impossible to predict. Hence, while many patterns can be observed in the market (for example, over large amounts of time, the stock market does grow wealth), it is very difficult to establish exactly what affects what and exactly how a given factor affects the market.

References

• CNN: Money 101
• Reuters: The worrisome relationship between a strong stock market and a low dollar
• A Dash of Insight: Understanding the Debate on the Dollar
• MarketSci: U.S. Dollar's Influence on the Stock Market
• The Adelph Blog: Deeds, Not Words, on the US Dollar
• National Center for Policy Analysis: Bob McTeer's Economic Policy Blog -- Dollar Confusion

Resources

• "The New York Times" Opinion Pages: Paul Krugman - Adjustment and the Dollar