The U.S. Dollar and the Stock Market
The U.S. dollar remains one of, if not the most important benchmark currency in the world, as the American economy continues to lead the global financial markets in terms of size and market cap. But 2020 was not friendly to the greenback, as the rapid devaluation of the dollar to prop up the flailing economy has caused investors to seek safety and stability through other means. For the first time in three years, the U.S. Dollar lost value in 2020 and hit its lowest price levels since April of 2018. Historically speaking, a fall in the value of the U.S. dollar means that the prices and value of equities will rise which is exactly what we witnessed as major stock indices cruised to all-time highs throughout 2020. In February and March, during the brief but intense bear market, the U.S. Dollar hit its 2020 highs, so the correlated inverse relationship between the dollar and the stock market is evident.
But what will this bring for the dollar for 2021?
So far, the U.S. dollar has rallied this year, which of course, manifested itself in a volatile start to the year for the stock market. As the U.S. Federal Reserve continues to print money and hand out stimulus packages to help citizens deal with the ongoing COVID-19 pandemic, we should see a short-term continuation of a falling dollar combined with more money being pumped into the public markets.
But other factors affect the greenback as well, including the fear over the spike in cases for the novel coronavirus, despite the initial rollout of vaccine doses. A breakdown in global trade for both political and supply chain reasons has also weakened the dollar, and added strength to other benchmark currencies like the Euro or the Chinese Yuan. Further to this, the sharp decline in U.S. Oil prices had a direct impact on global crude oil exports as demand for fossil fuels plummeted during the COVID-19 quarantine.
So what does this mean for the stock market?
\A recent Reuters poll saw over two-thirds of analysts interviewed say that they expect the dollar to continue to fall throughout 2021, even with the new Biden administration taking power shortly in the White House. With more stimulus checks being written and no real end to the recent spike in coronavirus cases insight, there is no reason to think that the economy reopening to capacity is an imminent outcome.
Finally, investors have flocked to new hedges to the dollar like cryptocurrencies or precious metals to shield themselves from inflation as is witnessed by Bitcoin hitting new all-time highs on a daily basis. The leading cryptocurrency recently hit $36,000 U.S. and many analysts have gone on record to anticipate price levels over $50,000 within the calendar year. Until there is some stability in global trade, which may eventually come under Biden, as well as a slow down in the Federal Reserve printing money to prop up the economy, the American greenback is destined to continue to decrease in value until some stable footing is reached at the end of the pandemic, whenever that may be.