Another Day, Another Dollar

The U.S. dollar has been on an unexpected journey over the past 18 months. In the initial innings of the Covid-19 selloff in March 2020, it was one of the few assets that appreciated in value. Investors embarked on a flight to safety, selling anything and everything they could while hoarding cash. Businesses likewise held onto their dollars, building up a cushion for uncertain times ahead.

Demand for greenbacks rose, and the value of the currency followed.

That was followed by a long, slow slide for the dollar in the rest of 2020, as companies and consumers learned how to operate in the pandemic and markets rallied. Federal Reserve money printing and profligate spending and borrowing by Congress expanded the quantity of dollars in the system, and the currency declined in value.

Analysts and economists were forecasting more dollar weakness in store for 2021. Instead, to the surprise of many, the dollar maintained its value and has even climbed in recent months.

The U.S. Dollar Index—or DXY, often casually referred to as the “Dixie”—is now up about 1% over the past year.

Here's Barron's Jacob Sonenshine on the counter-intuitive trend:

A strong dollar might seem unlikely—ludicrous, even—given recent headlines about the debt ceiling, inflation, and slowing growth due to supply-chain snafus and the Delta variant of Covid-19.

But compared with the rest of the world, the U.S. isn’t doing all that badly. Real growth in the U.S. is expected to increase by 2.5% in 2023, outpacing Europe, while the Federal Reserve might be tightening monetary policy more aggressively than its central-bank peers overseas. Government spending is also likely to be lower than expected.

And with the 10-year Treasury yield over 1.5%, much higher than elsewhere in the developed world, the dollar’s strength might only be beginning.

"As the U.S. escapes the interest-rate zero bound, leaving the eurozone and Japan behind, the global savings glut is set to be drawn toward the dollar, which can outperform the majority of other currencies in the coming year," explains Société Générale currency strategist Kit Juckes.

Essentially, the current run of dollar strength is unlike the one early last year. It's not a flight to safety that's increasing demand for the currency, but relative U.S. economic strength. A 1.5% bond yield might not be much in absolute terms, but it's certainly more attractive than similar negative-yielding bonds in Europe or Japan. And that's driving more global investment flows into dollar-demoninated assets, boosting the currency's value.

A strong dollar is good for American tourists traveling abroad, and for companies that buy goods abroad in local currencies then sell them in the U.S.

For globe-spanning businesses that report in dollars, however, a strong dollar is a headwind. Foreign profits are worth less when translated back to dollars when the currency is stronger. And U.S. exporters can see less demand for their products when they get more expensive for foreign buyers.

Domestically focused companies stand to gain from continued dollar strength, especially when the driver of that trend is U.S. economic growth. Jacob points to CSX, Marathon Petroleum, Wells Fargo, and Nucor as potential beneficiaries—they each generate at least 85% of their revenue in the U.S.

Read Jacob's story for more on the companies and stocks that stand to benefit from the recent strength of the U.S. dollar.