Why Does a Weak Dollar Increase the Stock Market?

by Linda Richard

A dollar is a dollar in the United States where the American dollar is currency, but a dollar is weak or strong when compared to international currencies. The dollar is weak when it takes more dollars to buy foreign currency; it is strong if a foreign-currency purchase takes fewer dollars. Comparisons with the euro or the yen give an idea if the American dollar is weak or strong. A weak dollar affects the stock market in international trading and in overseas earnings by United States companies.

Currency Comparisons

Use a currency converter on a finance website to compare the dollar to foreign currency. Comparisons change every day because most countries allow their currency to float or fluctuate on the world market. Only China ties its currency to the value of the American dollar. When the euro or the yen value is 77 cents U.S., it’s stronger than the dollar. When the Canadian dollar value is $1.03, it’s weaker than the dollar. The fewer dollars it takes to buy a foreign currency, the stronger the dollar is. If your dollar buys 77 cents in international goods, the dollar is weak. If 77 cents buys a dollar in international goods, the dollar is strong.

Effect on Market

Some economists believe that the effect of a weak dollar on the stock market is not immediate. John J. Murphy explains a ripple effect in commodities and interest rates before the weak dollar affects the market. A weak American dollar encourages foreign sales of goods, because the foreign markets benefit from the low value of the dollar. Foreigners get more goods for their money. American manufacturers who export goods on the world market like a weak dollar. Payment in euros, yen or similar foreign currency gives the American manufacturer added value. Businesses trading in the international market often surge with the weak dollar. Companies with factories on foreign soil have the advantage of the value of overseas earnings. The company collects payment in foreign currency that is valued greater than the dollar. International businesses often see an increase in stock prices with a weak dollar.

Market Performance

If you run a business in the U.S. and import goods for resale, a weak dollar might make the merchandise too expensive to make a profit. Publicly traded American businesses operating only in the U.S. don’t benefit much from the weak dollar, and the weak dollar doesn’t significantly affect stock market values for these businesses. The stock market responds to world events, moods, instability or insecurity, and all of these affect stock prices for American businesses more than the strength of the dollar.

Inflation

A weak American dollar is not the same as inflation. Inflation is the rise in the cost of goods that keeps the dollar from buying as much as before, occurring when too much money is available. This increases the price of goods. Inflation calculations tie to the Consumer Price Index in the U.S. Inflation’s effect on the stock market is tied to the world’s opinion of the U.S. dollar, making the dollar weak. Inflation can affect corporate earnings, the price of stock and dividends as well, because the company pays more dollars for goods and services.

About the Author

Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor's degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.

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