The stock market crash that Americans don’t see

Bearish sentiment overtook Wall Street, and about the only good news that came out of Friday’s trading session was that the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P500 (SNP INDEX: ^GSPC)and Nasdaq Compound (NASDAQ INDEX: ^IXIC) bounced off their worst levels of the day to end above their worst close of the year in June. Even with the slight recovery, however, the indices were down 1.5% to 2%.

Data source: Yahoo! Finance.

As important as stock markets are, they are not the only financial market that investors should pay attention to. Indeed, the Federal Reserve’s aggressive interest rate hikes have also had a big impact on currency markets, and moves there have shown the impact that higher interest rates for U.S. assets have had on the currencies of other countries in the world. This has good news and bad news for American investors and consumers, depending on your portfolio and your personal financial exposure to foreign markets.

Image source: Getty Images.

Historical Currency Movements

Not only have the major foreign currencies lost considerable value against the US dollar, but the speed of the declines has been almost unprecedented. Consider some recent moves:

• The value of the Euro fell 1.5% today alone, dropping below $0.97 and reaching levels not seen in about 20 years.
• The pound saw even steeper declines, plunging 3.5% to $1.085. It was the biggest daily move since initial volatility at the start of the COVID-19 pandemic in early 2020, and the exchange rate was the weakest the pound has been against the dollar since the mid-2020s. 1980s.
• The Japanese yen has also been struggling lately, with the dollar recently hitting 146 yen, its highest level since 1998. The drop in recent months has been so severe that the Japanese central bank has intervened in the foreign exchange market to first time in 24 years to at least try to slow the rate of decline.
• Other currencies are also exceptionally weak. The Canadian dollar fell to 73.58 US cents, while the Australian dollar hit 65.3 US cents. The Swiss franc fell slightly to $1.02 as the dollar also threatened to break parity.

More generally, the US dollar index, which measures the strength of the greenback against a basket of other currencies, has reached highs not seen in more than 20 years.

The explanation is quite simple. With the Federal Reserve raising interest rates, investors in US dollar-denominated investments like bonds can earn relatively high returns. Foreign investors therefore exchange their foreign currency for US dollars in order to buy these securities, thereby increasing the value of the greenback against foreign currencies.

What this means for US stocks

A strong dollar is great news for American businesses that depend on importing materials and then sell mostly finished goods to American consumers. Better exchange rates reduce their import costs and boost their margins.

Unfortunately, the reverse is true for US companies with extensive overseas operations. The revenue a multinational generates from a country with a weak currency translates into fewer US dollars, which hurts sales growth and profitability. An extreme example is Philip Morris International (NYSE:PM), which relies almost entirely on non-US sources for its international tobacco business. However, many other consumer giants do considerable business overseas and could be under pressure on their earnings due to the strong dollar.

Amid major stock market declines, it’s easy to overlook how significant the extreme volatility in the currency markets could be. With Europe still under threat from Russia’s invasion of Ukraine and supply chain issues plaguing global trade, any vulnerability in currency markets could lead to unexpected systemic disruptions if conditions do not improve. not quickly.

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Dan Caplinger has no position in the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.