Equity Factors & The Mighty US Dollar

How Sensitive Are Factors to Changes in the USD?

April 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • The US dollar had a slightly negative relationship with the stock market since 1996
  • Some equity factors are more sensitive to changes in the US dollar than others
  • On average the sensitivity is zero, but as often averages are misleading


The Economist’s Big Mac Index measures if currencies are over- or undervalued by comparing the implied versus actual exchanges rates of foreign currencies to the US dollar based on the cost of a McDonald’s Big Mac burger. As of January 2019, this unique measure of currency valuation highlighted that out of 55 currencies, only three were overvalued: Switzerland, Norway, and Sweden.

Given that the majority of currencies are undervalued to the US dollar, this makes most countries attractive for investment from US-domiciled investors, assuming they believe in purchasing-power parity (PPP) based on burger prices. The current fortune of US investors is partially based on the strength of the US dollar, which is supported by the US economy and the unwinding of the quantitative easing programme by the US Fed. Higher interest rates make the US dollar attractive in the current low interest rate environment (read Factors & Interest Rates).

Investors have historically focused on analyzing the impact of the US dollar on stock market sectors like energy or materials. Given the rise of factor investing in recent years, it is interesting to investigate the influence on factors, which is the focus of this short research note.


We utilize six factors namely Value, Momentum, Size, Low Volatility, Growth, and Dividend Yield in this analysis. The long-short, beta-neutral factors are created by selecting the top and bottom 10% of stocks in the US stock market ranked by the factor definitions, which are in line with academic research. Only stocks with a minimum market capitalization of $1 billion are included. Portfolios are rebalanced monthly and each transaction incurs costs of 10 basis points.


The US dollar index of the St. Louis Fed (DTWEXB) is trading at the hig