Line chart showing that international equities have traditionally performed well when the dollar weakens.
Left Y-axis: MSCI EAFE Index Level, Right Y-axis: U.S. Dollar Index level; X-axis: 1991-2022
From 1991 to 2000 the MSCI EAFE Index has tracked the U.S. Dollar Index to some extent. Since 2002, however, as the U.S. Dollar Index fell from a high of more than 118 to a low in 2008 near 72, the MSCI EAFE Index rose from a low just above 868 to a high of more than 2,300. This outperformance during the relatively low dollar index values continued until 2014, when the dollar index rallied from near 80 (June 2014) to above 95 a year later. Since that time the indexes have largely mirrored each other. When the dollar index fell to 89 in February of 2018, the MSCI EAFE Index rose to over 2,051. And when the dollar index fell from above 98 in mid-2020 to near 94 at the end of September, the MSCI EAFE Index rose from a recent low near 1,725 to over 1,855. By the end of Q3 2022, when the dollar index was near 112, the MSCI EAFE Index stood at about 1,661.
Line chart compares the U.S. Dollar Index to the MSCI Emerging Markets Index.
Left Y-axis: MSCI EM Index level, right Y-axis: U.S. Dollar Index level; X-axis: 1991-2022
The MSCI Emerging Markets Index began this period by more closely tracking performance of the U.S. Dollar Index, then began to mirror its performance. In late 1996, when the U.S. Dollar Index began its rise from near 88 to over 118 in early 2002, the emerging markets index did not follow. Then, as the dollar index fell from its 2002 high to a low below 72 in mid-2008, the emerging markets index rose from roughly 272 in early 2003 to highs above 1,100 in 2008. Corresponding highs and lows have followed, with the U.S. Dollar Index briefly peaking near 88 in February 2009, just as the emerging market index fell from over 1,200 in May of 2008 to below 570 in March of the same year. Similar mirror behavior followed in 2018 (dollar index low near 89, emerging markets index high near 1,200) and 2020 (dollar drops to about 92, emerging markets index rises from around 848 to above 1,080). By the end of Q3 2022, the dollar index was near 112, while the emerging market index was near 876.
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 1991 to September 30, 2022. The MSCI EAFE Index and the MSCI Emerging Markets Index are equity indexes that capture large- and mid-cap representation across 21 developed market countries (excluding the U.S. and Canada), and 24 emerging market countries, respectively, around the world. Index returns do not represent investment performance or the results of actual trading. Index returns represent general market results, assume the reinvestment of dividends and other distributions, and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
- A strong U.S. dollar has been a headwind for international equity prices this year.
- Developed markets outside of the U.S. continue to struggle with structural issues, including populist politics and aging demographics. The Russia-Ukraine war likely is exacerbating Europe’s rapidly slowing economic growth and rising inflation.