[Financial Planning for the 100-Year Life] Relative Returns of US and Korean Stock Indices Determined by the Dollar Index

As of April 7 this year, the S&P 500 index, representing the U.S. stock market, fell 13.9% compared to the end of last year, while the KOSPI's decline was relatively smaller at 3.0%. The variable with the highest correlation coefficient between the relative indices of KOSPI and S&P 500 is the Dollar Index. Using data from January 2000 to March 2025, the correlation coefficient between these two variables is very high at minus (-) 0.83. In other words, when the Dollar Index rises, the S&P 500 tends to outperform the KOSPI, and conversely, when the Dollar Index falls, the KOSPI tends to rise more.

The Dollar Index, which rose to 109.96 in January, dropped to 102.07 last week. Considering the inherent problems in the U.S. economy, the probability of the Dollar Index declining is high in both the short and medium to long term. The U.S. economy is expected to enter a recession this year. According to surveys by the University of Michigan and the Conference Board, consumer sentiment has sharply contracted due to President Donald Trump's high tariff impositions, and expected inflation has surged. Consequently, forecasts predict the economy will fall into recession. On April 3, the Federal Reserve Bank of Atlanta's 'GDPNow' model projected the U.S. economic growth rate for the first quarter at minus (-) 2.9%. Michael Feroli, an economist at JP Morgan, lowered the U.S. economic growth forecast for this year from 1.3% to minus 0.3% due to tariffs. As consumption, which accounts for 69% of the gross domestic product (GDP), decreases, the economy will enter a recession and employment will decline.

In this case, the Federal Reserve (Fed) is expected to lower the benchmark interest rate. President Trump has pressured the Fed to cut rates, saying, "Now is the perfect time for Chairman Powell to lower interest rates." The Fed's monetary policy goals are 'price stability' and 'maximum employment.' Although prices are somewhat unstable, the likelihood of rate cuts is high as employment declines. If the U.S. economy falls into recession and interest rates are cut, the Dollar Index will fall further.

Additionally, the Trump administration is expected to pursue policies that induce a decline in the dollar's value. Steven Mnuchin, Chairman of the White House Council of Economic Advisers (CEA), argued in the 'User Guide for Restructuring the Global Trade System' written last November that the overvaluation of the dollar has entrenched the U.S. trade deficit and weakened manufacturing competitiveness. He stated that tariffs are merely tactical measures to resolve trade imbalances, and that inducing a weaker dollar is essential for correcting the U.S.'s external imbalances and strengthening manufacturing competitiveness. Mnuchin advocated for inducing a weaker dollar through a Mar-a-Lago Accord, similar to the 1985 Plaza Accord. The U.S. Treasury Department is expected to designate some countries, including China, as currency manipulators in the 'Currency Report' (Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners) to be released this month, thereby encouraging currency appreciation among major trading partners.

There are many structural factors contributing to the decline of the Dollar Index. First, according to the International Monetary Fund (IMF) forecast, the U.S. share of global GDP will decrease from 26.5% in 2025 to 25.4% in 2029. A reduction in the U.S. share means a decline in the Dollar Index. Next, last year, the federal government debt was very high at 124.1% of GDP, and net external debt was 89.3%. A decline in the dollar's value can help resolve internal and external imbalances. Furthermore, the dollar's share of global central banks' foreign exchange reserves fell from 71.1% in 2000 to 57.8% in 2024. Going forward, some central banks, including those of China, are expected to reduce dollar holdings and increase gold purchases.

Over the past decade (2015?2024), the S&P 500's average annual growth rate was 12.2%, while the KOSPI's was only 3.6%. However, during this period, the S&P 500 was overvalued relative to economic variables such as nominal GDP, while the KOSPI was undervalued. From 2000 to 2010, the KOSPI's average annual growth rate was 12.5%, and the S&P 500's was 1.0%. A similar situation could unfold with the decline of the Dollar Index.

Young-ik Kim, Adjunct Professor, Graduate School of Economics, Sogang University