Posts Tagged ‘US Dollar Index’

The Dollar is Falling!

The dollar is falling… the dollar is falling!

That’s what I noticed today as the dollar index fell 0.59% (that’s big in the currency world).

It’s a big deal because a falling dollar has usually led to gains in equities. But this time the market ended the day mixed. The Dow Jones was up 0.43% and the S&P climbed 0.23%. The Nasdaq stuck out like a sore thumb, falling 0.21%. It seems that the old dollar/stock market pattern isn’t holding up as well as it used to.

This indicates to me that the dollar carry trade is losing some of its luster. In the end, these ultra-low interest rates probably won’t last forever.  I expect the dollar carry trade to be replaced with the Yen carry trade (since Japan apparently doesn’t believe in higher interest rates). The new Bank of Japan governor has also shown a preference for a weaker currency. So moving forward, we should see a big correlation between the Yen and the US stock market.

As you can expect from a falling buck, gold was on the up and up, gaining $14 to close at $1,151 an ounce.

Honestly, though, I wouldn’t read too much into a falling dollar. The market has been data driven as of late. Investors are all looking for signs that the recession is truly over. And as long as this week’s reports show an improving economy, the market could head higher, taking the US dollar along for the ride.

The report I’m most interested in is the December Consumer Price Index report this Friday. This report measures inflation at the consumer level. If this report shows a big bump in consumer prices, the market could easily sell-off. That’s because higher inflation means the Fed is more likely to boost interest rates.

And higher interest rates signal an end to cheap money.

Will the CPI come in very high? I doubt it. Gas prices were close to flat in December. And at the same time, retailers were discounting everything. So I wouldn’t be shocked if CPI came in at or under consensus (0.0%-0.1% gain).

At this point I’m cautiously bullish, especially on the commodity complex.

A Thought on the Dollar Carry Trade…

Why is the stock market not plummeting while the US dollar index gets stronger?

Well, maybe it’s because the dollar carry trade is being replaced by the Yen carry trade?

Since November 30 the Yen rose from 86.28 to 89.86 to the dollar. At the same time, the US dollar index jumped from 74.50 to 77.09.

So the charts confirm my suspicion. It also means that the dollar can move higher without affecting the stock market much.

The move to the Yen is justified since Japan is suffering deflation and will keep interest rates low for a really, really long time. And by this time next year, US rates will probably be higher.