Months ago, the financial headlines were littered with stern warnings that the US dollar was depreciating rapidly. There was a popular narrative drawing fear that a US dollar demise was imminent. A few short months later, the dollar narrative has flipped.According to today’s headlines and narratives, the tide has turned for the greenback. To wit: we saw a popular financial pundit claiming that the strengthening US dollar was “steamrolling” the world.With this new bullish narrative, let’s explore how a strengthening US dollar affects the US economy and foreign economies.For the US, a stronger US dollar is a mixed blessing. On the positive side, it suppresses inflation by lowering the price of imported goods, which is particularly relevant today, given the Fed’s battle to return CPI to 2%. For travelers, a strong greenback stretches further abroad.However, a stronger US dollar makes US exports more expensive in foreign markets, squeezing the revenues of multinationals. When those foreign earnings are converted back into US dollars, they are worth less and can be a headwind for S&P 500 earnings. Roughly 40% of S&P 500 revenues come from outside the United States.For the rest of the world, the impact is more painful. Developed and emerging market economies that carry trillions of dollars of US dollar-denominated debt face a financial squeeze as their local currencies buy fewer US dollars, making debt service more expensive in local currency terms.US dollar appreciation is akin to rising interest rates for these countries. Commodity-importing nations face higher costs for oil and raw materials as they are largely priced in dollars.Moreover, capital tends to flow toward dollar-denominated assets, draining liquidity from foreign markets precisely when they need it. The graph below, courtesy of FinViz, shows the approximate 5% appreciation in the dollar index since February.What a difference a few weeks can make. Today, we share the equity factor relative and absolute analyses below to show how the market sectors and factor drivers rotate, even when it seems, as it did, that certain factors and sectors will continue to beat the market. Momentum stocks, including many of the chip makers and hardware stocks, were leading the market.As the graph on the right shows, the momentum ETF was grossly overbought for the better part of the last five weeks. However, about a week ago, it started underperforming and is now trading at fair value. At the same time, the equal-weighted S&P 500 has moved higher, indicating a strengthening of its relative score. But notice the upward trend was slightly to the left. This indicates that its absolute score was weakening as its relative score improved.It’s also worth noting that the three most overbought stock factors are in the small-cap sector, with the microcap sector having the highest absolute score. The microcap sector was often the most oversold factor for the last few months.The second graphic shows how the once-lagging healthcare and financial sectors have risen to the most overbought levels, while technology, like momentum, sits almost perfectly at fair value. Will the trends reverse to favor momentum and technology now that the quarter-end is over, or are the more recent trends durable? We should be able to better answer that question toward the end of the week.Original Post