The Potential Impact of a Rising U.S. Dollar on U.S. Sectors

The Potential Impact of a Rising U.S. Dollar on U.S. Sectors

Originally posted on May 8th as part of Chaikin Analytics Member Content. 

We have received a lot of questions on the impact of a rising dollar on different areas of the market since I wrote about it on April 30th in the Market Survival Guide so I wanted to take a brief moment to highlight what we are seeing.

For the U.S. Dollar Index (DXY) the trend over the past year has been up. The index is above the rising 50 (red) and 200 (green) – Day Moving Averages. Recently the index broke through resistance and has pulled back to test that level, so far successfully.

While we do not know with 100% certainty if the Dollar is going to continue to advance, we do know that there will be an impact on the different areas of the equity market. At the sector level, the chart below highlights the 1-year correlation to the DXY.  

As we can see, the sectors which are leveraged to commodities have the largest inverse correlation to the Dollar. This makes sense since commodities are priced in U.S. Dollars. On the positive side, the most positively correlated sector is Utilities. This makes sense because most utilities receive most of their revenue in the United States.

Should the Dollar continue to rise, we would expect that to be a headwind for commodity-leveraged equities and a tailwind to Utilities.

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