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What Does a Strong U.S. Dollar Mean for Commodities, Stocks, and Cryptocurrencies?

Updated: Jul 22, 2022

Adrian de Vernou, Summer Intern, 2022

On July 5th, 2022, a flight to the U.S. dollar pushed the Euro to its lowest point in nearly 20 year against the dollar. Over this past year, many other currencies are weakening significantly against the dollar. The Japanese yen is down 18.5%, the Norwegian krone 13.7%, the British pound 13.5%, the Australian dollar 9.5%, and the Canadian dollar 4.6%.¹

This surge in the dollar’s strength has impacts on the price of commodities, the stock market, and on cryptocurrencies. In order to analyze the effects a strong dollar has on these economic sectors, it is important to understand why the U.S. dollar is so strong right now.

The foundation for the U.S. Dollar’s strength

The main factors supporting the strength of the dollar are two fold. The first is domestic, where the Fed’s aggressive .75 percentage point interest rate hike to combat inflation gives hope that the state of the economy may improve. On top of the interest rate hike, the U.S. economy is in a better position than other nations in recovering from the pandemic due to its low unemployment rate and high savings.

The second reason for the dollar’s rally is the dimming economic prospects in Europe due to Russia’s Invasion of Ukraine, leading to an energy crisis on the continent. Additionally, many European nations are experiencing seriously high inflation but with varying responses from central banks.

How a Strong Dollar Impacts the Price of U.S. Commodities

The relationship between the strength of the dollar and the price of commodities are inverse. As the dollar becomes stronger, the price of commodities in the United States decreases. If it becomes more expensive for other countries to buy commodities in USD, demand for U.S. commodities decreases. On the opposite end of the spectrum, a weaker dollar makes American commodities less expensive, thereby increasing demand.

Over the past four months, from March of 2022 to July 2022, the U.S. Dollar / Euro gained nearly 13%. During the same time, the price of gold in USD decreased nearly 15%. Clearly, the weakening of the Euro, as well as many other currencies, against the dollar has made gold significantly more affordable. Gold, however, is not an outlier.

Additional commodities that slipped on July 5th include U.S. oil, copper, and agricultural commodities. Not every commodities’ price decreased, especially when analyzing the price of these commodities globally. However, the drop in their price, particularly of oil, gives hope to some economists that the price of oil and inflation may gradually begin to decrease. Commodities are typically used as hedges against inflation, given that inflation devalues the dollar, making it less expensive for foreign nations with non dollar currencies to buy oil, thereby increasing demand and overall price. Therefore, the slip in commodity prices experienced earlier this week may signal a potential decrease in inflation over the long run, though certainly not guaranteed.

The Effect of a Strong Dollar on the Stock Market

Within the stock market, companies with the least dependence on revenue from foreign nations tend to be the ones that perform the best. As of July 8th, 2022, the S&P 500 U.S. Revenue Exposure Index, a subset index of the S&P 500 that accounts for domestic oriented-companies, is down 10.26% year to date.

While on paper that may seem bad, it is tremendous when compared to the S&P 500 Foreign Revenue Exposure Index, a subset index that tracks companies in the S&P 500 with higher than average revenue streams abroad. The S&P 500 Foreign Revenue Exposure Index is down 21.1% year to date as of July 8th, 2022.²

The Effect of a Strong Dollar on Cryptocurrencies

The strength of the dollar tends to not impact the price of cryptocurrencies directly. However, many of the factors that strengthen the dollar tend to hurt the major cryptocurrencies. In the crypto space, high inflation and fears of a recession have proved to be devastating. Major cryptocurrencies such as Bitcoin and Ethereum are down 57% and 68% respectively year to date.

The way people feel about the economy and markets contribute to the price of many cryptocurrencies, which is why negative trends in major economic indicators such as the S&P 500 and CPI provoked this massive decrease in these digital currencies. However, if the decrease in commodity prices signal a potential decrease in inflation, consumer and investor sentiment may increase, bringing crypto along with it.

¹ Wall Street Journal ² New York Times

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