Opinion - The US Dollar

The devaluation of the US Dollar is a much greater concern than anything else going on right now, and it's only just starting to make headlines.

The true value of the US Dollar is a bit nebulous (taking into account monetary policy, fiscal policy, geopolitical relations, trade flows, etc.), but the easiest and most common way to measure the value is via DXY, the Dollar Value Index. This index is measured as the strength of the US Dollar against 6 other key currency pairs:

1. The Euro (EUR)

2. Japanese Yen (JPY)

3. British Pound (GBP)

4. Canadian Dollar (CAD)

5. Swedish Krona (SEK)

6. Swiss Franc (CHF)

The US Dollar, historically considered the global reserve currency, has strengthened considerably over the past decade. The DXY strengthened from the high 80's in 2018, to almost 115 in the last half of 2022. Lots of this can be chalked up to monetary policy decisions stemming from the era of high inflation and low interest rates, but even in 2019-2020, it had strengthened by over 10%.

From the beginning of 2025 until now (April 19, 2025), the DXY has returned -8.4%, with most of that devaluation in the last 3 weeks alone.

The S&P 500 on the other hand, has returned -10.2% in the same time frame.

Why is this important? You won't necessarily find stock valuations affecting GDP, and you won't directly see the DXY index mapped to inflation, and those are really the two big things to worry about... right?

Nah.

One thing that I keep hearing lately is that the value of the stock market doesn't accurately reflect the health of the economy. This is generally said when the stock market is booming, but unemployment and inflation are rising. Sure, I can get on board with that.

Right now, the interesting thing is that we're in the opposite scenario. The S&P 500 is in correction territory, the Nasdaq reached a full on bear market temporarily, but inflation and unemployment are coming down. But I think this doesn't tell the whole story. I think inflation and unemployment are lagging indicators and in today's much more complex and globalized economy, there needs to be a better way to think about this.

My recommendation - Use Dollar-Indexed Market Returns as an Inflation Benchmark

By indexing both DXY and the value of the S&P 500, you can see how the valuation of the stock markets is amplified by taking USD returns into account at the same time. So I did that.

By looking at the two combined, you can see how much the true value of the stock market has shrank compared to just the YTD return. And it's not great. Here's a chart:

*source - DXY and SPX values from Bloomberg Terminal, calculations and charting by me

YTD, the total value of the S&P 500 is down 17.7% if you include the deterioration of the US Dollar.

This practice can effectively be thought of in the same form as leverage - by taking the value of something denominated in USD, decreasing the value of it, and decreasing the value of the USD at the same time, an amplified reaction occurs. Quite often, this can be a good thing - a balancing act of sorts. Sometimes one lever goes up, and the other goes down, resulting in a relatively stable value. When both levers go in the same direction? Well, that could be really good or really bad. Or really really really bad. How bad exactly? Well, bad enough that even Ray Dalio is a bit freaked out right now.

Is this merely short-term pain for long-term gain?

No, that's not how the world operates and that's not how global trade operates. Don't trust me? That's fair, I can get into the why's and how's of this later, but the key takeaway here is that these are uncharted waters. There's a lot of potential ways that this can play out, but there's not a lot of potential upside here. Even undoing the tariffs entirely won't undo all of the geopolitical damage we've caused in the last 2 weeks alone. The US economy is a red flag at this point, and other countries will learn how to move forward and continue to globalize, without the US.

My biggest concern is that we reach a tipping point. I don't know exactly what that tipping point looks like, but here's a guess - other economic powers identify this weakness and get sick of the US's bullshit, and actively devalue the US Dollar to the extent that, even if we dropped any sort of restrictive trade policies (ahem... tariffs), we wouldn't be able to trade shit anyways because 1) our money isn't worth anything, and 2) growth stems from investment, and nobody is going to invest in an economy with such volatile financial policies and massive downward pressure on equity valuations (compared to equity valuations in other economies). GDP is going to look bad for Q1 and Q2 of 2025, but we're just barely getting started here.

My message to the US Dollar?

Tschüss - I'll miss you being the world's reserve currency.