I want to share with why the market hates a strong dollar, and what you really need to know about dollar movement…
How Dollar Plays into Stock Market
You need to understand how the dollar plays into the stock market.
The stock market has a lot of companies that deal business internationally. The U.S. dollar is typically used as a ‘safe haven’ or reserve currency for these international countries.
If their currency begins to go bad, they may stockpile more of our currency – they are always watching the U.S. dollar. Our currency is considered the ‘place to be’ and is very stable.
The U.S. dollar is used as a safe haven to companies that deal business internationally. As the stock market goes up in terms of a strong dollar, business becomes more expensive and business and pricing exchange become more difficult overseas.
Companies which trade or sell products to China, Argentina, or Brazil, for example, are dealing in those currencies but always looking at the U.S. dollar. This makes it much more expensive for those companies.
The extra expense causes the market to dislike a strong dollar, because their earning will go down. It all ties together…
Commodities and Energy Stocks
It affects mostly commodities and energy stocks like gold, oil, and silver. When the dollar bounces, commodities and energy companies fall. It typically works on an inverse relationship.
In terms of telecommunication companies that are local or other local stocks (ex: Florida Power & Light Co.), it may not cause as drastic of an effect. Other companies who do international business suffer from falling stocks. They dislike a strong dollar due to exchange rates and fees.
If you’ve been trying to understand how the dollar and stock mark fit together, I hope this helps you understand that as the dollar rises, the stocks fall – however, it doesn’t always work this way. Usually commodities and energy stocks are highly affected when this happens.
Keep this in mind when trading in commodities, energy companies, and other international companies. Always pay attention to the US dollar.