Investments: Episode 31
Why did the markets go down Tuesday because the dollar gained value? And then on Wednesday the markets rebound in part because the dollar fell in value. That doesn't feel right?
Let's dig in and understand why this happened:
- It helps to remember that markets are truly global even if we are talking about the S&P 500 or Dow 30. Companies buy and sell globally and they also source capital globally. A change in the exchange rate can materially impact a company's profitability.
- There are a lot of people who are short the dollar. If there are a lot of investors, and companies, betting against the dollar's value then any move to the upside has a negative impact on their results.
- If you have money coming from international markets its value is materially impacted when you bring it home. A stronger dollar means your profit is reduced upon repatriation.
- Also, if your stock price is denominated in dollars and dollars are suddenly worth more, this means it takes fewer dollars to buy your stock. The opposite is also true.