U.S. businesses’ performances necessarily affect the U.S. dollar. Determining just how this will happen, however, is a baffling question. The answer must be evaluated on a case by case basis, but a general rule of thumb is that when U.S. stocks increase in price, the U.S. dollar will go down.

Why does this happen? Shouldn’t investments within the United States help out their currency? When looked at in this light, the actual results seem perplexing. But you need to think about this with a different frame of mind. Businesses within the U.S. need their home currency in order to buy and sell items, pay for labor, and give out to stockholders. When dollars are spent by stockholders investing in a business, the price of the stock will increase while demand for the dollar decreases. This is why when stocks increase in the U.S., its currency will often lose value.

There is another way to think about this, of course. When foreign investors wish to invest in a U.S. business, they must exchange their home currency in order to buy the dollar. This increases demand, giving the dollar a bit more strength.

As you can see, this is a very complicated give and take between the stock market and the value of the currency. In order to fully understand what a currency will do both of these factors and the nuances that surround them must be considered together. Simply operating on one basis will oftentimes lead you into trouble with your trading.

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