Pricing Dollar Strength Risk

Abstract

The relative strength of the U.S. dollar does not explain the cross-section of expected returns. We find, however, that signed sensitivity of individual firms’ returns to moves in dollar strength matters for asset pricing. A portfolio that goes long high-dollar-sensitivity stocks and short low-dollar-sensitivity stocks earns a multi-factor alpha of 3%-7% per year. Sorting on dollar sensitivity captures firm fundamentals - in particular fraction of revenue from abroad. Dollar sensitivity has implications for profitability and fundamental momentum, as well as the relationship between momentum strategies across countries.

Keywords: factor models, global risk, momentum, exposure

JEL Classification: G12, G15