How often have you heard the following? “A weak dollar is bad for stocks. But a strong dollar . . . that’s awesome!” I’d guess quite a lot.
For much of the 2000s the dollar was on the reverse of a tear—falling most years relative to pound sterling, euro, and most of our other trading partners. In 2009, for the first time in over 30 years the Canadian dollar was worth more than the dollar. Horror! There were periods of reversal—2005 saw the dollar strengthen. The dollar was strong in the back half of 2008 too. But never mind! For the most part, folks have it fixed in their brains: A weak dollar is bad for stocks, and a strong dollar good.
After all, the dollar was weak for much of the decade, and stocks overall had a lousy decade—basically flat. Proof! On the other hand, the dollar was weak in 2003, 2004, 2006, and most of 2007 when stocks boomed. And it was strong in 2001 and 2008 when they fell. But, on the third hand, the dollar was also weak in 2002 as stocks fell, strong in 2005 as stocks rose, and weak again most of 2009 when stocks staged a historically massive comeback.1 So, on the fourth hand, what’s behind all this? What’s true?

Dollar Dilemma

Folks fear a weak dollar signals people don’t have faith in the US economy, which leads to, or is symptomatic of, slow growth and bad stock returns. Plus, a weak dollar makes imports more expensive. Because the US has long been a net importer (see Bunk 48), that makes most things more expensive ...

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