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How the Dollar’s Decline Will Boost the U.S. Economy

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Dollar's Decline
23
Aug

How the US Economy Will Boost from the Dollar’s Decline

The US Dollar Index (DXY) reached its highest point in 20 years on Monday. This saw a rise from the January 2021 low at +21.8% to +21.8%. This is a notable new high. The euro was the main reason for this move. It is now back at parity with dollar. The Dollar’s Decline index is hugely weighted in euro at 57.6%. Therefore, swings in EURUSD can have a significant effect on DXY. Below is a chart that shows how the dollar index has recovered to levels not seen in the 2000s after reaching a multi-year peak.

A stronger dollar is more likely to hurt companies that make a larger share of their revenues outside of the US. This has been evident in the stock market’s performance over the past 18 months. We keep track of the geographical revenue exposure of Russell 1000 stocks in our International Revenues Database. Below is an average performance of Russell 1000 stocks that have earned 50% or more outside the US from January 2021’s low in the Dollar Index.

This also shows the average performance for Russell 1000 stocks that generate over 90% of their domestic revenue. This is a sign of a stronger dollar. In this dollar rally, the average “domestic” stock in Russell 1000 has increased by 16%. International stocks, which are stocks that earn more than half their revenue from outside the US, have seen a decline of 3%. Stocks that don’t fall into either of these categories have seen an average gain of 4.62%.

Below is a detailed breakdown of Russell 1000 based upon international revenue exposure? The stocks that generate 100% or more of their domestic revenue make up the 10th decile. The ninth, tenth and eleventh deciles saw huge gains of 14.15% 17, 17.47%, and 17 respectively. Other parts of the spectrum saw gains in single digits and even a slight decrease of 22 bps at the third decile.

Russell 1000 Deciles: Domestic vs. International Revenues Author

Given the nature of various businesses, some sectors naturally will have greater domestic/international revenue exposures than others. For example, almost all of the revenue from Utilities and Real Estate is generated in the US. These two sectors have been among the most successful since the low dollar. Energy is the sector with the highest returns, but it also has the fourth highest exposure to domestic revenue after Financials. Materials and Tech generate the lowest amount of revenue in the US and have had mixed returns since January 2017.

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