The U.S. dollar fell for the first time in three years in 2020 and remains under pressure as the new year gets under way. What that means for stocks, however, depends on why the dollar is falling.

And so far, the dollar’s decline has been for reasons that are good news for stock-market bulls around the world.

“A weaker dollar will boost earnings in dollar terms,” which is good news for U.S.-based exporters, but dollar weakness also reflects “extra easy financial conditions,” which are bullish for equities both in the U.S. and abroad, including emerging markets, said Zachary Squire, co-founder and chief investment officer at hedge fund Tekmerion Capital Management, in an interview.

Also, the U.S. serves as the “ultimate source of global liquidity,” which tends to flow through to liquidity conditions around the world, he said.

See also: U.S. dollar suffers first annual drop since 2017

2020 was a volatile year for both the dollar and the stock market. The ICE U.S. Dollar Index DXY, -0.48%, a measure of the currency against a basket of six major rivals, jumped to a more-than-three-year high in February and March as the coronavirus pandemic sparked chaos in global financial markets, contributing to a scramble for dollars.

The dollar subsequently headed south, with the index in December dropping to its lowest since April 2018 and finishing 2020 with its first annual loss in three years. The index has seen renewed selling pressure as the new year gets under way.

Stocks, meanwhile, tumbled into a bear market in February and March last year as lockdowns were imposed on consumer and business activity to combat the spread of the coronavirus, but soon rebounded in a technology sector rally that saw the Nasdaq Composite COMP, +1.02% soar more than 40% for 2020, while the S&P 500 SPX, +0.92% advanced 16.3% and the Dow Jones Industrial Average DJIA, +0.83% gained 7.3%.

Squire sees more downside for the dollar — at least in coming months. Dollar weakness isn’t just about the Fed and its easy money policies, he said, arguing that its actions put it somewhere in the middle of the pack in terms of aggressiveness when it comes to global central banks.

One of the more overlooked factors is the deterioration of the U.S. trade balance, he said, a phenomenon amplified by last year’s collapse in oil prices, which is likely to keep a lid on U.S. crude output and, more important, crude exports.

Ironically, the trade deficit has expanded because a relatively robust U.S. economy compared with the rest of the world means that imports have risen more than exports. That’s translated into deterioration in the current account — a tally of a nation’s transactions with the rest of the world, including net trade in goods and services, net earnings on cross-border investments and net transfer payments.

That’s pretty unusual for a U.S. economy that fell into recession in 2020, he noted. Typically, a contraction in U.S. demand sees an improvement in the current account as imports slow, providing support for the dollar during economic slowdowns.

What’s more, this comes after roughly a decade of stability for the current account balance, Squire noted. That stability, however, was largely a function of the U.S.’s transition from a net importer of petroleum products (equal to nearly 2% of gross domestic product in 2010) to eliminating its oil trade deficit as a result of the boom in shale production.

Oil production has fallen since early 2020 — signaling a decline in net exports, which tend to trail output.

“When you layer deteriorating trends in the non-petroleum trade balance on top of a slowdown in US oil production…that’s just a big problem for the dollar,” Squire said.