The Impact of the Dollar on Stock Prices

by Cindy Quarters

The value of the U.S. dollar is always considered relative to the value of other currencies in the world, such as the Canadian dollar, the yen and the euro. Changes in the worth of the dollar can impact the stock market, so investors should always have an idea of its value to help them with investing decisions. Responding to the rise and fall of the dollar may help investors to maintain the value of their portfolios.

Tracking the Dollar

To know if the value of the dollar changes, investors should check with the New York Board of Trade, NYBOT, which trades the dollar and measures its value against six other currencies: the Japanese yen, the euro, the Canadian dollar, the British pound, the Swiss Franc and the Swedish Krona. Checking in with the currencies board on the NYBOT on a regular basis keeps users abreast of any rise or fall in the value of the dollar and helps them to be prepared for any related changes in stock prices.

Relative Values

As a general rule, the relative value of stocks and commodities to one another remains fairly constant. So, for example, the value of silver as compared to gold now is similar to what it has been in the past. However, because the dollar itself is worth less, it takes more dollars to buy these things. This also applies to stocks. The value of the stocks relative to one another remains fairly constant, but the price goes up because the dollar is worth less. If the dollar becomes stronger, the price of stocks goes down, because each dollar has more purchasing power.

Interest Rates

Interest rates are closely related to the value of the dollar and are linked to stock prices as well. High interest rates drive investors to invest in bonds instead of stocks, for a better return on their investments. When interest rates drop, investors tend to shift their investment dollars into stocks, to better take advantage of the situation. The move from bonds into stocks causes many stocks to be sold in a short period of time, resulting in an increase in stock prices.

Other Considerations

Another important consideration regarding stock prices and the dollar is that when the value of the dollar is low, companies that trade internationally must spend more money for raw materials and overseas wages or other expenses. This has a significant impact on a company’s earnings and may cause the value of its stock to decrease. If the dollar becomes stronger, a company has to spend less for the same services and materials overseas, increasing a company’s earnings and likely the value of its stock as well.

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