The Strong Dollar's Impact on Markets and Economy in 2025

The U.S. dollar has been in a strengthening trend relative to the rest of the world since 2021. Mitch offers his thoughts on what that means for the markets in the new year.

What a Stronger U.S. Dollar Means for Markets and the Economy The U.S. dollar has been getting stronger. In 2024, the dollar gained against every major peer country’s currency, rising especially sharply against emerging markets countries. The fourth quarter of 2024 saw an especially sharp appreciation versus a basket of developed market currencies (chart below), marking the biggest rally in nearly a decade. All told, the greenback enters 2025 at a multi-year high.1 The U.S. Dollar Has Been in a Strengthening Trend Since 2021 Source: Federal Reserve Bank of St. Louis 2 Navigate Market Volatility in a Changing Global Landscape The U.S. dollar climbed to multi-year highs in 2024, highlighting economic resilience while raising questions about how investors can adapt. Historically, dollar strength or weakness hasn’t shown a clear correlation with market returns, underscoring the importance of focusing on core fundamentals when making investment decisions. Our guide, “Helping You Manage Market Volatility 3,” offers tools and insights to help you navigate this landscape confidently. Inside, we answer key questions, including: Market downturns can and will occur, but what should you do? How can diversification help you manage volatility without compromising your returns? When volatility is too much for you to handle, how can a money manager help? Can volatility actually be an opportunity? If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today! Download Zacks Volatility Guide, “Helping You Manage Market Volatility.” 3 To help readers gain an understanding of why the U.S. dollar has been so strong, consider the list of factors below that tend to drive currency strength: Strong economic growth relative to peer countries. Fertile ground for foreign direct investment, often in anticipation of high rates of future earnings and economic growth. Relatively attractive yields on risk-free or very low risk sovereign debt, with an expectation that rates will not move materially lower in the short- to medium-term. Pro-cyclical policies expected from the ruling government (fiscal policy, deregulation). The United States checks all these boxes. The first two factors—strong growth and attractive investment opportunities—have been in place for years now, aided greatly by the boom in artificial intelligence capex and enthusiasm for what lies ahead. The second two factors—attractive yields and pro-cyclical policy—are more recent, particularly as the Fed has inserted more cautious language regarding the future path of rates. Looking ahead in the new year, the Trump administration’s policies of looser regulation, lower taxes, and across-the-board tariffs could bolster the dollar further if the policies translate to growth and higher inflation, since a Fed ‘pause’ on lowering interest rates would raise incentives to hold dollars. Dollar tailwinds could strengthen further if Europe and China show any additional signs of economic weakness. In my view, the most high-level view of dollar strength and weakness is embedded in the question, is the United States the most attractive country for investment this year? I think the answer is yes, which also means I could see the dollar getting even stronger as 2025 unfolds. From an investment standpoint, there are arguments in both directions about the ‘dangers’ of too much strength or too much weakness in the dollar. A weak dollar raises the cost of imports, reducing the purchasing power of U.S. consumers and businesses that rely heavily on imports to drive domestic sales. A strong dollar comes with its own drawbacks as well. U.S. exports become more expensive for foreign buyers, which can hurt multinationals that derive a sizable percentage of earnings from abroad. A strong dollar also means foreign tourists have less to spend with they visit, and countries with large amounts of dollar-denominated debt can experience higher interest payments—which can sap government investment and global demand. Much like the impact of a strong vs. weak dollar is not very straightforward in economic terms, there is also no correlation or causal link to stock market performance. There are too many other factors—like earnings and economic growth—driving the equity markets for the dollar to have an outsized influence. The chart below looks at the nominal U.S. dollar index (blue line, left axis) and the performance of the S&P 500 (red line) over the last 10 years. As investors can see, stocks have performed very well during periods when the dollar was weakening, and stocks have also rallied when the dollar strengthened substantially (2024 being a prime example). Put simply, the fact that there is no significant correlation historically between dollar strength or weakness and market returns tells us we should be focused on other fundamentals when making investment decisions. The U.S. Dollar vs. Foreign Currencies (blue line, left axis) and S&P 500 (red line, right axis) Source: Federal Reserve Bank of St. Louis 4 Bottom Line for Investors The strong dollar outlook for 2025 is far from assured. There’s a good argument that U.S. exceptionalism (strength relative to the world) is already priced into the dollar, such that better-than-expected economic performance from the rest of the world could bolster foreign currencies. U.S. federal budget deficits are also significantly larger than they were four years ago, and it remains to be seen how an extension of 2017’s tax cuts will be financed. Much remains to be seen. For markets, however, the path of the dollar may not matter much in 2025. A strengthening dollar historically corresponded with one of the best periods for stocks, 1995 – 2000, but also one of the worst: the 2008 bear market. At the same time, the dollar’s weakening period from 2003 – 2006 did not adversely impact the economic expansion and stock market recovery then, just like a strong dollar is not likely to shift the economy or market’s direction now. While the future of the dollar remains uncertain, one thing is clear: market fluctuations are inevitable. Factors like inflation and volatility are part of the natural rhythm of the financial markets. The real challenge isn’t eliminating them—it’s building a strategy to navigate them with confidence. Our guide, “Helping You Manage Market Volatility 5,” is designed to help you do just that. Inside, you’ll find actionable insights to help you stay calm and focused, even during turbulent times. Learn how to: Market downturns can and will occur, but what should you do? How can diversification help you manage volatility without compromising your returns? When volatility is too much for you to handle, how can a money manager help? Can volatility actually be an opportunity? If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today! About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. Talk to a Zacks Wealth Advisor today. © Zacks Investment Management  |  Privacy Policy 1 Wall Street Journal. December 31, 2024. 2 Fred Economic Data. December 30, 2024. 3 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion. 4 Fred Economic Data. December 30, 2024. 5 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion. DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. 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