Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Decline of the Dollar Has Wall Street Rethinking Stock Strategy

Stock MarketsAug 19, 2020 08:09PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. Decline of the Dollar Has Wall Street Rethinking Stock Strategy

(Bloomberg) -- Six months ago, exchange rates would have mattered less in a global investor’s stock-picking process. Now with the dollar facing what some warn is an existential threat, currencies are in the limelight.

With over 40% of non-U.S. firms’ sales exposed to the world’s reserve currency, according to data from Jefferies (NYSE:JEF) Financial Group Inc., everyone is trying to map how a tumbling dollar re-shapes investment across equities. Some are betting emerging market shares will benefit, others point to value in America, while Japanese stocks are seen lagging should the greenback slide more.

“The fastest selloff in risk assets in history followed by the fastest rally showed extraordinary volatility tied to currency markets, so yes, you’d have to take a view of how these would impact your hedges and equity investments,” said George Boubouras, head of research at K2 Asset Management in Melbourne. “You do have to be cognizant of currency risks far more.”

With the Bloomberg Dollar Spot Index down around 10% since its March high, the challenge for investors lies in determining the depth and longevity of its decline.

The Winners

For New York-based hedge fund manager Thomas J. Hayes, the dollar’s downtrend is a signal to buy riskier EM stocks and commodities.

“Cheap dollar funding encourages risk taking and money flows into perceived ‘higher growth’ locales,” said Hayes, chairman of Great Hill Capital LLC. He favors emerging-market stocks partly as companies will have an easier time servicing dollar-denominated debt.

Equities in developing nations have recorded a consistently inverse relationship with the dollar, with the most profound impact in Latin America, according to Citigroup Inc (NYSE:C). strategists including Jeremy Hale.

“Moves in correlations between Latam equities and the dollar tend to be more pronounced and occur prior to moves in other regions,” they wrote in a recent note. “Emerging market equities are currently underperforming the U.S. relative to historical soft dollar periods, and look good value to outperform should the greenback fall another 10% from here.”

In Asia, Chinese and Hong Kong firms stand to benefit most as the dollar tumbles, according to an analysis earlier this month from Jefferies strategists including Desh Peramunetilleke.

“While exporters to the U.S. are negatively impacted due to a weaker dollar, such periods are usually very supportive of global equities, led by EM/Asia,” the Jefferies team wrote. From a global sector point of view, “cyclicals such as energy, materials and capital goods benefit strongly.”

To be sure, not everyone places currency fluctuations as a core part of their investment considerations. Case in point is Phillip Kim, a portfolio manager at Morgan Stanley (NYSE:MS) Investment Management in Chicago, who said his team is more focused on discussions such as value versus growth.

“We focus on quantitative factor data and fundamentals but currency and fund flows can confirm strength in a particular region or country,” Kim said.

Meanwhile, JPMorgan Chase (NYSE:JPM) & Co. sees a weaker dollar as a reason to favor U.S. stocks. It’s ratcheting up its allocation to American equities as a cheaper currency makes the assets more attractive to foreign investors, while also creating a growth headwind for overseas firms, strategists including Nikolaos Panigirtzoglou wrote in a note this month.

Invesco Ltd.’s Nixon Mak, a strategist, is also a fan of U.S. stocks, even if a weaker currency ends up weighing on their absolute returns for global investors.

“With strong domestic demand and sustainable earnings growth from certain sectors, we believe the U.S. equity market is still favorable now and the currency effect could be offset by the return from capital,” he said.

The Losers

At the other end of the scale, Japanese stocks are often flagged as benefiting least from a weaker dollar. Local currency appreciation can be “problematic” for equity performance in Japan -- and also Europe -- where correlations with the dollar are not as “clear-cut” as those in emerging markets, wrote the strategists at Citi.

“If the dollar is in a structural downtrend, the yen has room to appreciate further and that means Japanese equities will fall to last place on our radar,” said Nader Naeimi, head of dynamic markets at AMP (OTC:AMLTF) Capital Investors in Sydney. “While emerging markets will stand to benefit from a weaker dollar, Japan is the opposite.”

Meanwhile in Europe, though U.K and Russian miners, and e-commerce players have shown strong performance during periods of dollar weakness, Danish biotech stocks, Swiss healthcare suppliers and Dutch food retailers are some of the key sectors that underperform, according to the Jefferies analysis.

“Traditionally the currency effect is minimal with only a maximum 3% to 5% of impact in absolute return,” said Invesco’s Mak. However, the pandemic-induced rout earlier and the change in environment to one of low growth and yield has changed the investment dynamics, he said.

“In this sense, the currency return could become a major component in a total return perspective,” Mak said.

©2020 Bloomberg L.P.

Decline of the Dollar Has Wall Street Rethinking Stock Strategy

Related Articles

Dollar Edges Lower Ahead of Fed Meeting; Yuan Weakens
Dollar Edges Lower Ahead of Fed Meeting; Yuan Weakens By - Sep 21, 2021

By Peter Nurse - The dollar edged lower in early European trade Tuesday, slipping from a month high, ahead of the start of this week’s crucial Federal Reserve...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email