The strong U.S. Dollar has been seen as the villain of a stock market rally.

But Wells Fargo equity strategist Gina Martin Adams says that the strong dollar is good for the stock market.

Adams points out that the dollar’s been on the rise since 2011-- something we forget amid the volatile rip higher between the middle of 2014 and the beginning of 2015. While the initial rise was about perception of improving economic conditions and easier Fed policy, volatility increased starting in the middle of 2014 because investors had to price in the fact the Fed was likely to change policy. “It was disruptive, but ultimately stocks continued to rise,” Adams says. “Recall, the index rose with the dollar throughout the last several years, and rose 7.7% during the dollar surge from the middle of 2014 to spring 2015. Likewise, the index peaked shortly after the dollar peaked last year, and has struggled with dollar malaise,” she says.

One of the strongest bull markets in recent history-- during the 1990s-- was also accompanied by a rising dollar.  

Impact to S&P earnings: A misconception

The negative impact of the strong U.S. dollar was cited over the last year by many companies--from industrial names like Cummins (CMI) to tech companies  like Microsoft (MSFT) to consumer brand Coca-Cola (KO) and staples like Proctor & Gamble (PG). After all, about 30% of the revenues for S&P 500 companies come from outside of the U.S. and thus are negatively impacted by a rising dollar.

“There’s more to the story than is popularly suggested,” says Adams. If 30% of S&P sales come from international, 70% come from the domestic economy-- and we don’t hear about the benefit of a stronger dollar, including cheaper component parts to import or apparel for retailers. Some of this, Adams suggests, is that when the dollar has a negative effect, companies point to that more while when results are strong, companies look to cite organic growth and not the help from the dollar.

Relationship with oil

While the dollar and oil traditionally have a short-term inverse relationship, Adams says you have to take a bigger picture long term.

“You can have periods of time when oil prices are stable, the dollar rises. It’s the periods when the two are moving in more volatile fashion that’s disruptive,” she says.

The strong dollar is a relative position

Adams points out too that the strong dollar has been a result of our improving position relative to the rest of the world and relative to central bank action from the rest of the world. The DXY--which is 70% dependent upon the euro and Japanese yen--has increased less rapidly than the trade-weighted dollar which has more dependence on the Chinese renminbi. This reflects some of the divergence in central bank policy, as China has surprised more recently with central bank actions.

What now?

While the dollar index is on pace to record the slowest quarterly year-over-year gain since the first quarter of 2014, Adams says she expects it to rebound now given higher anticipation for an interest rate increase this year. The probability of a June move is now seen at nearly 54%, from 2% last month.

“The idyllic environment for stocks right now is a very modest dollar rise and oil prices that are very stable and fade into the background as a driver of stocks.”