A weaker dollar will continue to support a broad stock market rally that has already seen an extraordinary run-up this year. Since topping out in late last September, the ICE U.S. Dollar Index has fallen about 13%. As of Friday, it’s down about 2.3% this year. A weaker dollar “starts to set into motion a few different dynamics,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. A softer dollar is a boon for the S & P 500 because a large number of companies in the index generate significant sales overseas. With their exports priced more competitively against overseas rivals, these companies can now sell more goods abroad. And, with the currency translation, these firms stand to make more profit even if the volume of goods solds is unchanged. .DXY 1Y mountain ICE U.S. Dollar Index over past year A weaker dollar typically lifts large-cap stocks that are more likely to have an international footprint. However, one sector the trend will significantly bolster are mega-cap tech companies that have already enjoyed a boost this year from the mania for generative artificial intelligence. The tech sector generates even more sales abroad than does the S & P 500 as a whole, which clocks in at about 40%, experts say. “This would just be kind of another tailwind for them to potentially continue to perform in the second half of the year,” said Shannon Saccocia, chief investment officer at NB Private Wealth. Conversely, a weaker dollar is less likely to help small-cap companies that are less likely to have a presence overseas. Running same inflation race Market experts think that the downward momentum in the dollar will continue for some time. That’s because the Federal Reserve is closer to stopping its rate hiking campaign than other central banks around the world that are continuing to fight persistent inflation. B. Riley Financial’s Art Hogan said the trend has some legs to it, possibly through the first quarter of 2024, assuming the Bank of Canada, the Bank of England and the European Central Bank make more progress fighting inflation with higher interest rates. “We’re all running the same race against inflation,” said Hogan, adding, “Our central bank’s in the lead, so therefore, our currency is dropping more against those other currencies that are represented by more central banks. So, I think the leveling out happens when they catch up to us in that race against inflation.” Hogan expects the dollar could possible level out around the mid-90s range, using the ICE U.S. Dollar Index as a benchmark, around where it traded in early 2022. The index ended Friday at 101.09 “Obviously, it’s not going to go in a straight line. And there’s been volatility around that, but it certainly feels like the dollar index could settle in at that level,” Hogan said. “I think all that’s healthy.” To be sure, Neuberger Berman’s Saccocia said a weaker dollar is unlikely to be as meaningful as it is in other years, given the continued global discussion around inflation and the possibility of a recession. “There wasn’t as much emphasis on currency translation last year” when the dollar strengthened going into the autumn, Saccocia said. “And so, I don’t think it’s going to be as strong a tailwind as it would be just from a sentiment perspective, as the dollar weakened because there are so many other factors that are involved.” Still, various parts of the markets stand to gain as the dollar comes in. Beyond the artificial intelligence plays, a weaker dollar would also lift emerging markets. VWO YTD mountain Vanguard FTSE Emerging Market ETF in 2023 Emerging markets’ economies are typically more tied to commodities prices, which are set to rise as the dollar weakens. What’s more, emerging market companies more easily pay back dollar-denominated debt when the greenback is weaker. “We’ve got some more room to come in,” Hogan said, referring to the dollar weakening further. “And the more it comes in, the more those positive attributes play out as a tailwind for the equity markets.”
This story originally appeared on CNBC
