Currency moves touch equities through two distinct doors, and conflating them is the single biggest source of confusion in this topic. The first is microeconomic / translational: a US multinational that books revenue in euros, yen or yuan converts those earnings back into a stronger or weaker dollar, mechanically inflating or deflating reported EPS. The second is macro / liquidity: the dollar is the funding currency of the global financial system, so a broad dollar move tightens or loosens financial conditions worldwide and shifts risk appetite — a channel that can swamp the translation arithmetic. The core tension is that these two channels do not always point the same way, and the dollar-equity correlation is regime-dependent rather than fixed, so naive "strong dollar = bad for stocks" rules fail frequently.

How the channels work

1. Translation / transaction (company level). Roughly 40% of aggregate S&P 500 revenue is generated outside the United States — Apollo (using FactSet geographic-revenue data) put the figure above 41% in early 2025, calling it the highest since 2013 and near the ~43% record of 2011. The exact number drifts with index composition, year and methodology, but the broad point (~40% foreign) is well established. A stronger dollar shrinks the dollar value of those foreign sales and earnings (translation), and can also erode price competitiveness abroad (transaction). The reverse — dollar weakness — is an earnings tailwind. WisdomTree and others note that historically, periods of dollar weakness have preceded above-average S&P 500 earnings growth, though such estimates are correlational and sample-dependent.

2. Funding / liquidity (macro level). Because much of the world borrows in dollars, a rising dollar tightens global financial conditions. The BIS frames the broad dollar as a global risk factor: a 1-percentage-point appreciation shock against a broad basket dampens the EME growth outlook by over 0.3 ppt, and growth-at-risk (worst-5% outcomes) by roughly 0.6 ppt (BIS Working Paper 695 / BIS Quarterly Review). The mechanism is a risk-taking channel — dollar strength worsens dollar-debtor balance sheets, lenders retrench, and dollar credit (including trade credit) tightens broadly, spilling over even to countries whose currencies did not depreciate.

3. Carry and capital flows. The dollar funding/borrowing dynamic links FX to cross-border equity flows. Carry trades borrow low-yield currencies to hold higher-yield ones; unwinds (e.g. the yen carry unwind of August 2024) can force rapid de-risking that hits global equities regardless of any earnings link.

Sector asymmetry. A strong dollar tends to hurt large-cap exporters and consumer multinationals (Coca-Cola, P&G, Philip Morris are the standard examples) and commodity producers (commodities are dollar-priced, so a stronger dollar is a mechanical headwind). It tends to help domestically focused small caps and net importers, whose input costs fall. Non-US and emerging-market equities are usually the most dollar-sensitive of all via the funding channel.

How it's used in practice

Analysts and PMs use FX primarily as an earnings-revision and intermarket overlay, not a standalone signal:

• EPS sensitivity bridges. Sell-side models estimate how a given move in the trade-weighted dollar shifts index or company EPS. Widely cited rules of thumb cluster around 2–4% of S&P 500 EPS per 10% move in the broad dollar the other way (e.g. JPMorgan/Chase commentary has cited ~2%; some sell-side desks ~3–4%), larger for international-heavy sectors — but treat this as a commonly-quoted heuristic spanning a range, not a measured constant; the exact figure varies by bank, hedging assumptions, period and methodology.
• Intermarket / regime context. Traders watch DXY (or the broad dollar) alongside rates, commodities and credit spreads to read the liquidity regime. A sharply rising DXY with widening spreads is a classic risk-off tell; a falling dollar often accompanies broad risk-on and EM/commodity outperformance.
• Currency-aware allocation. Allocators decide whether to hedge foreign-equity FX exposure, and tilt toward domestic small caps vs. exporters depending on the dollar trend.

Adoption, debate & evidence

The macro channel — dollar as a global financial-conditions and risk barometer — is well-supported in central-bank research (BIS, and the academic literature on the "global financial cycle"). It is mainstream and empirically grounded for emerging markets and non-US assets.

The contested part is the dollar's relationship to US equities themselves. The correlation is unstable and regime-switching. StoneX and multi-decade reviews document that the DXY–S&P 500 correlation flips sign: it tends to be positive in steady-growth regimes (both reflect US economic strength) and negative when the Fed is actively tightening/loosening or when volatility spikes and the dollar's safe-haven bid dominates risk assets. So the folklore "strong dollar is bad for US stocks" is true on the earnings line but unreliable on price, because the same dollar strength is often a symptom of US economic outperformance that supports equities. CEPR research further argues the dollar is not an unconditional safe haven. Net: FX is a real, sourceable input to earnings and to global liquidity, but a weak, sign-unstable standalone timing signal for the S&P 500.

Strengths & limitations

Works best for: explaining cross-sectional dispersion (exporters vs. domestics, US vs. EM), anticipating earnings translation effects on multinationals, and reading global liquidity stress (the funding channel is robust and theoretically grounded).

Fails / misused when: traders treat the dollar-equity link as a fixed sign. The #1 misuse is mechanically shorting US stocks on dollar strength — ignoring that the correlation is regime-dependent and frequently positive. Second is double-counting: a company may hedge FX, so headline translation math overstates the true P&L hit. Third is confusing level with change — equities react to the rate of change and surprise in the dollar, not its absolute level. FX is also endogenous (driven by the same rate/growth forces that drive stocks), so causal claims should be made cautiously.

Sources

• BIS, "The broad dollar exchange rate as an EME risk factor," BIS Quarterly Review (Dec 2020); BIS Working Paper 695, "The dollar exchange rate as a global risk factor" — dollar as global risk factor, risk-taking channel, growth-at-risk estimates.
• Apollo Academy, "The Problem with the Current S&P 500 Narrative" (Jan 2025), using FactSet geographic-revenue data — >41% of S&P 500 revenue generated abroad, highest since 2013, near the ~43% 2011 record (composition- and year-dependent).
• WisdomTree ETF Blog, "A Silver Lining of Dollar Weakness?" and Hartford Funds, "Dollar Dynamics" — translation channel and dollar-weakness/earnings historical link (correlational).
• StoneX Market Intelligence, "The Dollar and S&P 500's Positive Correlation…" — regime-dependent, sign-unstable DXY–S&P 500 correlation.
• CEPR VoxEU, "The US dollar: Not a traditional safe haven" — dispute over the dollar's safe-haven status.
• World Economic Forum explainer on carry trades; ScienceDirect/Kellogg working papers on EM carry returns — funding/carry channel and its risks.

Flagged dispute: the EPS-sensitivity figures (~2–4% per 10% dollar move, varying by source) are commonly-cited heuristics, not measured constants; and the dollar→US-equity directional link is genuinely contested and regime-dependent.