Last week's decline in the US Dollar Index (DX/Y) marked a 10% fall from its mid-January peak, officially placing us in a falling dollar environment for our US Dollar Study.

The US Dollar has fallen drastically over the past few months. The ICE U.S. Dollar Spot Index DX/Y dropped to an intraday low of 99.01 on Friday, April 11, notching a 10% drop from the mid-January peak. That moves us into a falling dollar environment based on our historical US Dollar Study. Therefore, we will take the opportunity to show how various assets and segments of the market are affected by the rise and fall of the greenback. If you need a refresher on the construction of the US Dollar Index, the index methodology document can be accessed here.

As mentioned above, DX/Y fell to 99.01 last week, dropping below the 10% decline threshold for the first time during its current descent. The 10% demarcation between rising/falling dollar environments is just a useful guideline, not a technical indicator that a trend will continue. Therefore, investors should not necessarily make big shifts in their allocations based on just the 10% decline. However, the weakening technical picture displayed by the Dollar over the past several weeks has been difficult to ignore. We have seen the default chart of DX/Y give three consecutive sell signals while moving back to a negative trend at the end of March. The recent chart low of 99.50 is also the lowest level seen since mid-April 2022. DX/Y is now in oversold territory, so we would not be surprised to see some consolidation over the next few weeks. That consolidation could come in two ways, either consolidating in price with a reversal higher, or consolidating over time. The longer DX/Y remains around 100, the more its trading band will adjust. Overhead resistance can be seen initially at 103.50 while further support is not seen until 95 to 95.50.

Our data on the ICE U.S. Dollar Spot Index goes back to the inception of futures contracts on the U.S. Dollar Index (in 1985). Since that time, we have seen many significant moves for the dollar, allowing us to see how different assets perform in different dollar environments.

Study Parameters:

Rising Dollar Market: Any move of at least 10% from a low constitutes a new "rising dollar market." The beginning of this trend is established at the low watermark and the trend remains in force until a correction of at least 10% occurs, at which point the peak of that rally then marks the end of the rising trend in the dollar. This represents a "trough to peak" move in the dollar, and that period is what we use to qualify a rising dollar market.

Falling Dollar Market: Any decline of at least 10% in the dollar index from a peak begins a "falling dollar market." The beginning of this trend is established at the high watermark and the trend remains in force until a rally of at least 10% occurs off a low, at which point the trough of that decline marks the end of the falling trend in the dollar. This represents a "peak to trough" move in the dollar, and the period within is what we use to qualify a falling dollar market.

By this measure, there have been a total of 15 falling dollar markets and 14 rising dollar markets since 1985 (including the current environment). The average duration of a cycle (rising or falling) is 495 days. On average, rising dollar periods have lasted longer than falling dollar periods, at respective averages of 598 and 399 days. The last two falling dollar environments have been below average in duration, lasting for 289 days from Sept 2022 to July 2023, and 291 days from March 2020 to January 2021. If the current decline ended today (Monday), the 88-day peak to trough drop would be the third shortest decline in our study. Below we have a summary of the prior rising and falling environments, paired with the returns of major asset benchmarks during each period.

The graphic below delves further into the average returns of various asset class representatives in different dollar environments. The results were interesting as many assets did show meaningful performance biases during either rising or falling dollar markets. The red bars in the graphics below represent the average performance during all falling dollar markets, while the green bars represent the average performance by that same asset class during all rising dollar markets. For some assets, we did not have data going back to 1985, so returns reflect the average since the time at which we had data, with all assets having data going back to at least 1995.

Observations:

• The S&P 500 Index SPX has performed well in rising and falling dollar environments, although we see the average performance in falling environments outperform rising periods by roughly 2%.
• The spread between rising and falling environments is more negative (favoring falling) for value (VOOV) relative to growth (VOOG).
• The Nasdaq-100 Index is the only equity representative to show higher average returns in rising vs. falling environments.
• Both developed and emerging markets are significantly stronger in falling environments, but the spread favoring falling environments is larger for developed market equities.

Of course, there is a significant amount of variation among the companies that make up the broad US equity market and, being big believers in sector rotation, we would be remiss if we didn’t take a closer look to see how the various segments were impacted by the dollar. Although we had to adjust the time frame of the study a bit based on data availability; the sector portion of our study includes data beginning in 1992. Our study includes the 11 broad sectors (basic materials, consumer cyclicals, consumer non-cyclicals, energy, financials, healthcare, industrials, technology, telecommunications/comm services, real estate, and utilities). The results of the study are shown below, following the same structure as the broader study.

Observations:

• Basic materials show the most favorable average returns during falling dollar environments.
• Technology shows the second highest average returns during falling environments, but that is more due to the dominance of the technology sector, since it outperforms during rising environments.
• Energy, real estate, industrials and staples show spreads that favor falling dollar regimes.
• Healthcare shows the largest spread favoring rising dollar regimes.