What role does the dollar play in the stock market?

It is natural to want to make more dollars to support a passive income; there are several means to do that but the most popular is trading. A report on Fintech Ltd., an automated trading software states that the popularity of such automated systems is on the rise as people see it as an easy entry into the stock market which was hitherto beyond bounds.

It makes one wonder how the dollar influences the stock market now with new players entering the market, many of whom have little or no knowledge of the working of the stock market.

Investment has gone global and you cannot separate the influence of currency on the financial market. It has become common for individuals to invest in foreign equities and trade in other currencies. It has its benefits and drawbacks.

When the dollar is strong the US stocks perform well and when it is weak the international stocks do well because the fluctuations in the local currency will affect your final returns.This trend is seen because a weak dollar means the other currencies appreciate and if you have managed to keep your investments in that currency then you will obviously earn more. The opposite is true when the dollar becomes strong.

Even and S&P 500 companies invest in overseas markets to make use of this factor of fluctuation and correlation between currencies.

A point to note in this context is that in a short-term investment these fluctuations make a huge difference but in long-term investments, the fluctuations cancel each other out.

Thus, we see that a strong dollar means lower equity prices whereas a weak dollar can make the stocks skyrocket. But having said that this is not good news if you are an investor because this will lead to inflation as prices go up, imports become more expensive and people move their investments from bonds to stocks driving the prices of stocks further.

The newbie traders using the automated trading systems too have a role to play in this drama. They normally try to take advantage of the fall of the dollar and this leads to another hike in stock prices. The drop in the dollar is also beneficial for emerging economies whose markets are tied to the US Dollar as it is considered to be a safe investment. And that is also the reason for these economies to suffer should the dollar price fluctuate too much.

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