Fears of global recession have helped the dollar skyrocket in value this year, allowing it reach parity with the euro for the first time in 20 years, and while the strength should help foreign exporters and potentially the European tourism industry, history shows the stock market may keep falling until the dollar stabilizes.
In the current environment, the dollar’s strength is a sign of investors’ concerns about a global recession, say Nick Colas and Jessica Rab of DataTrek Research, adding that it signals a flight to the relative safety of the world’s reserve currency, as the euro, British pound and Japanese yen fall to their lowest levels in years.
DataTrek notes the dollar, which is up some 16% over the past year, has posted similar rallies during past periods of market stress—including during the Great Recession, when the dollar jumped 22% in the second half of 2008, and in the first quarter of 2020, when it rose 7% as the pandemic forced businesses to shutter operations around the world.
In both cases, stocks hit a low the same day the value of the dollar peaked relative to major global currencies, the analysts note, saying it’s “difficult to believe” stocks have hit their lowest point this year until the dollar begins to weaken.
Experts aren’t so sure that’ll happen anytime soon: Oanda analyst Ed Moya says dollar dominance could “last a little while longer,” noting recession fears could still intensify and potentially push the euro down another .02 percentage points against the dollar.
In the meantime, Agathe Demarais, a global director of the Economist Intelligence Unit, says pressure on the euro will make imports of raw materials and energy products more expensive, adding to current difficulties linked to supply chain disruptions and further fuelling inflation for both producers and consumers.
She also outlined two silver linings: Exporters will benefit from their weaker native currencies, and the strength of the dollar could boost the prospects of the European tourism industry by attracting American tourists in the summer months—though that’s only after travelers grapple with rapidly rising airfares.
The euro and the U.S. dollar hit an equal value for the first time in 20 years on Tuesday morning. It slipped as low as around $1.00005, but has since inched up to about $1.0061.
After the dollar’s peak in 2020, its value fell about 13% over a period of two months, as the S&P added more than 30%. As the dollar’s value fell following its late 2008 surge, the S&P added more than 20%.
The dollar’s stunning rally has prompted analysts to warn that multinational corporations may be forced to lower profit expectations to account for weaker international currencies. In a Monday note, Morgan Stanley projected looming earnings revisions could push the S&P 500—already down 20% this year—as low as 3,400 points, implying some 11% downside from current levels of about 3,820. “From a historical perspective, this bear market may only be about half way done,” the bank’s Michael Wilson said, pointing out the current bear market has spanned only six months, whereas the median duration of historical bear markets is 12 months. Colas and Rabe note unstable foreign-exchange markets have been a common feature of every significant global market dislocation since 1970.