The Dollar Index (DXY) and the Stock Market
— How Dollar Strength and Weakness Affect Stock Prices
The Dollar Index (DXY) tracks the dollar's relative value against 6 major currencies. When the dollar strengthens, multinational earnings come under pressure and money flows out of emerging markets. If you're a Korean investor in US stocks, understanding this flow's connection to the won/dollar rate is essential.
What Is DXY?
DXY (the US Dollar Index) is a dollar-strength index computed by ICE (Intercontinental Exchange) that measures the dollar's relative value against the currencies of the US's major trading partners. The baseline value is 100, and above 100 means the dollar is stronger than it was at the 1973 reference point.
| Currency | Weight |
|---|---|
| Euro (EUR) | 57.6% |
| Japanese Yen (JPY) | 13.6% |
| British Pound (GBP) | 11.9% |
| Canadian Dollar (CAD) | 9.1% |
| Swedish Krona (SEK) | 4.2% |
| Swiss Franc (CHF) | 3.6% |
Since the euro's weight is an overwhelming 57.6%, the EUR/USD rate largely drives DXY. The Korean won (KRW) isn't included in DXY, but the won also tends to weaken strongly when the dollar strengthens.
How Dollar Strength and Weakness Affect the Stock Market
| Dollar Direction | Benefits | Hurts |
|---|---|---|
| Dollar strength (DXY↑) | US domestic-focused companies, short-term bonds, cash | Multinational earnings (FX losses), emerging-market stocks, commodities like gold/oil/copper, Korean investors' buy cost ↑ |
| Dollar weakness (DXY↓) | S&P 500 multinationals, emerging-market stocks, gold/commodities | Falling US Treasury yields, rising import prices |
The Relationship Between Dollar Strength and the S&P 500
S&P 500 companies get roughly 40% of their revenue overseas on average. When the dollar strengthens, profit earned abroad in euros, yen, yuan, and so on shrinks once converted back to dollars. Large tech names with a big share of overseas revenue — Apple, Microsoft, Alphabet, and so on — in particular tend to see EPS (earnings per share) drop by roughly 1–3%p when the dollar strengthens.
That said, when dollar strength is being driven by a strong US economy, stock prices often rise right alongside it. The dollar-stock relationship isn't simply inverse — it depends on the "reason" behind the dollar's strength. When it's accompanied by a rise in the 10-year Treasury yield, the pattern of dollar strength plus falling stocks tends to show up.
Dollar Strength and Emerging-Market Capital Outflows
When the dollar strengthens, global capital that had been invested in emerging markets (Korea, Brazil, India, Turkey, and so on) tends to flow back into US dollar assets. This leads to broad weakness across emerging-market stocks, bonds, and currencies. The pattern of the KOSPI and the won/dollar rate moving together can be understood in this context.
This flow becomes especially pronounced when an FOMC rate hike drives dollar strength, and a CPI surprise reinforces expectations of further hikes.
A Korean Investor's Perspective — the Won/Dollar Rate and DXY
For a Korean investor holding US stocks, the exchange rate creates a double effect.
- Holding during dollar strength (won weakness): even if the US price is unchanged, your won-converted valuation rises, boosting your gain. But this gain is an unrealized FX gain until you actually cash out.
- Buying new during dollar strength: conversion costs rise, pushing up your real buy price.
- Converting or selling during dollar weakness (won strength): you get less back when converting dollars to won, which can create an FX loss.
The overall effect of exchange rates on US stock returns is covered in detail in how currency exchange affects US stock returns.