Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Create Their Own Currency Hedges
Transcript
- Lucas: The S&P 500 closed Friday at 7,483, up nearly 2 percent in a single week. The Nasdaq hit 25,833. It feels like the bull market has found a second wind. But there's one number that isn't getting enough attention — the dollar. Luna: You mean the US dollar index? It's been sliding for months. Lucas: Exactly. The DXY peaked around 106 back in late 2022. As of this week, it's hovering near 98. That's about an 8 percent decline. And while a falling dollar usually spooks bond investors, for equity investors it's actually creating a natural tailwind — especially for the big multinationals that dominate the S&P 500. Luna: So the weak dollar is acting like a built-in hedge for companies that earn revenue overseas. Their foreign earnings get translated back into more dollars. Lucas: Right. Take Apple. Roughly 60 percent of their revenue comes from outside the US. When the dollar weakens, every euro or yen they earn buys more dollars. That's a direct boost to earnings per share. Same for Microsoft, for Alphabet, for pretty much every tech giant that reports in dollars but sells globally. Luna: I remember 2022 when the dollar was surging. Companies were blaming 'FX headwinds' every earnings call. Now it's the opposite. Lucas: It's a complete reversal. In 2022, a strong dollar was a major drag — it shaved anywhere from 3 to 8 percent off earnings growth for S&P 500 companies, depending on the sector. Now the tailwind is roughly the same magnitude in the other direction. And it's showing up in the numbers. The latest GDP data from January shows real GDP growth at 2.1 percent annualised, up from just 0.5 percent the prior quarter. A weaker dollar helps exports, boosts tourism, and makes US assets cheaper for foreign buyers. Luna: That's the classic 'dollar smile' theory, right? The dollar does well in a global crisis or a US boom, but it weakens during a global recovery. We're seeing the global recovery phase play out. Lucas: Exactly. The dollar smile was coined by Stephen Jen at Morgan Stanley years ago. The idea is that the dollar strengthens when the US economy is either booming or crashing — because capital flows to safety or to US growth. But when the rest of the world catches up, capital flows out of the dollar and into other currencies. That's exactly what's happening now. Luna: And the Fed hasn't moved rates. Fed funds are still at 3.63 percent. They've held steady since June. So the interest rate differential that was propping up the dollar is shrinking as other central banks hold or raise. Lucas: That's a key point. The European Central Bank and the Bank of Japan are no longer in emergency easing mode. The BOJ has actually started to normalise policy, which has strengthened the yen. That directly impacts the dollar index, since the yen is a major component. So the dollar's decline is partly a story of other currencies catching up. Luna: But for the average US investor holding an S&P 500 index fund, does a weak dollar matter? Most people don't think about currency when they buy a mutual fund. Lucas: They should, because it's an invisible performance boost. The S&P 500 is up about 10 percent year-to-date in dollar terms. But for a European investor, that same return would be even higher because the euro has strengthened. Conversely, for a US investor, the weak dollar means that imported goods — from electronics to clothing — are getting more expensive. That shows up in CPI, which the Fed watches. Luna: So there's a tension: the weak dollar helps corporate earnings, but it could reignite inflation and force the Fed's hand. Lucas: That's the big question for the second half of 2026. If the dollar keeps sliding, import prices rise. The Fed might have to raise rates again. But if they raise, they risk killing the bull market. It's a delicate balance. Luna: Let's talk about one sector that's particularly sensitive to this: technology. A lot of big tech companies have huge international exposure. But there's also the cloud and software companies — like Microsoft, Oracle, Salesforce — they sell globally. Lucas: Right. And the data this week shows some tech names are rallying hard. CrowdStrike is up nearly 11 percent in five days. Datadog up 8.6 percent. Palantir up 14.5 percent. A lot of that is company-specific momentum, but the weak dollar is providing a rising tide. Every dollar of revenue they report from overseas is worth more. It's like a hidden tax cut. Luna: It also makes US tech companies more competitive on price globally. If your software is priced in dollars, a weaker dollar means it's cheaper for foreign buyers. That could drive volume growth. Lucas: Exactly. And that's the part of the story that doesn't get enough attention. The conventional wisdom is that a weak dollar is bad because it signals economic weakness. But in this cycle, the weak dollar is actually a symptom of global rebalancing — the rest of the world is recovering, and that's good for US exports and for multinational profits. Luna: So it's not a 'risk-off' move. It's a 'risk-on' rotation. Lucas: Right. And that's why the Russell 2000, the small-cap index, has actually been flat to slightly down this week — down 0.5 percent in the five-day window. Small caps are more domestically focused. They don't get the currency tailwind. So the divergence between the Nasdaq and the Russell tells you the market is rewarding global exposure right now. Luna: That's a great point. The large-cap growth stocks — especially in tech — are benefiting from a double boost: strong earnings growth plus a currency tailwind. Small caps are left behind. Lucas: It's a classic bull market pattern where leadership narrows. But in this case, the narrowing isn't just about AI or software — it's also about currency. And that means investors need to think about hedging strategies. If you're heavily invested in US large caps, you're already getting an implicit currency hedge. But if you're in small caps or purely domestic sectors, you might want to consider adding some international exposure. Luna: Or even a currency-hedged ETF? Something like a hedged international equity fund? Lucas: That's one approach. But the simplest play might be to just own the S&P 500 and let the multinationals do the hedging for you. They have natural currency diversification built in. And with the dollar at these levels, the tailwind could persist if the global recovery continues. Luna: And if the dollar strengthens again? Then those same multinationals would get hurt. Lucas: True. But the consensus among currency strategists is that the dollar has further to fall. The IMF's latest data shows the dollar's share of global reserves has dropped below 58 percent — the lowest in decades. Central banks are diversifying into euros, yen, and even gold. So the structural trend is against the dollar. Luna: That's a big picture point. The dollar reserve status is eroding slowly. It's not a crisis, but it's a headwind for the currency. Lucas: And that's exactly why this episode matters. The bull market is not just about AI or earnings or rate cuts. It's also about the currency backdrop, which is quietly boosting returns. If you ignore the dollar, you're missing a key driver. Luna: I'm glad we dug into this. It's one of those 'hidden in plain sight' factors. And it ties directly to the market data we see every day. Lucas: Speaking of digging into topics — we've been doing these shows for almost two years now, and we keep them ad-free because of listeners like you who support the show directly. If our conversations have helped you think about investing differently — even just this one angle on currency — you can toss a few dollars in the tip jar at buy me a coffee dot com slash fexingo. It helps us keep making these deep dives without any sponsors or ads. Luna: And it really does make a difference. We don't have a huge staff — it's basically just us and a producer. So listener support keeps the lights on. Lucas: Exactly. So that's buy me a coffee dot com slash fexingo. No pressure, just an option if you find value here. Now, back to the dollar and the market. Luna: So if the dollar continues to weaken, what sectors benefit most besides tech? I'm thinking industrials and materials. Lucas: Good call. Industrial companies like Caterpillar and Deere have huge export businesses. A weaker dollar makes their equipment cheaper for foreign buyers. Same for chemical companies, aerospace, and even agriculture. The dollar index and commodity prices are inversely correlated generally, so a weaker dollar tends to boost gold, oil, and copper. That helps energy and mining stocks. Luna: And what about the consumer? A weak dollar means imported goods cost more, so retailers might face margin pressure. Lucas: Right. That's the downside. Walmart and Target have a lot of imported merchandise. So they might see cost increases. But companies with strong domestic supply chains or pricing power can offset that. It's a nuanced picture. Luna: So the key takeaway for investors: look at your portfolio's currency exposure. If you're all domestic small caps, you might be missing a tailwind. Lucas: Exactly. And for those who want a simple way to play the weak dollar, there are ETFs that track the dollar index or that invest in non-dollar assets. But honestly, the simplest approach is to own a broad US large-cap index and let the multinationals do the work. Luna: I like that. It's low maintenance and historically effective. Lucas: And it aligns with the data. The S&P 500 is at 7,483. The Nasdaq at 25,833. The dollar is at 98. These three numbers tell a story: global growth, US earnings resilience, and a currency that's boosting returns. Worth watching in the weeks ahead. Luna: Agreed. Thanks for the conversation, Lucas. Lucas: Always a pleasure, Luna. See everyone next time.