The dollar is finally dropping—and that’s great news for the stock market as it looks for more reasons to keep heading higher.
After spending most of 2023 trading between $101 and $105, the greenback has finally fallen out of bed. Through Thursday, the
or DXY, had dropped 2.3% to $99.89, its lowest level since April 2022. It needs to stay under $100, but that seems almost inevitable at this point. Expect the falling currency to get the attention that it hasn’t gotten quite yet amid so much hand-wringing over interest rates and Treasury yields.
“There’s a good chance that while ‘everyone’ is focusing on bonds/rates it’ll be the U.S. dollar that becomes the bigger macro trade down,” writes 22V Research technical analyst John Roque.
The dollar really has been boring this year, at least until this past week. Before Wednesday, one euro would have cost you between $1.05 and $1.10, one of the narrowest ranges for European and U.S. currencies since the failure of Bretton Woods in the early 1970s, according to Deutsche Bank strategist Alan Ruskin. That’s typical of periods when the Group of 10 central banks are doing the same thing and there’s little differentiation in the economic strength of their economies, he says.
That may be about to change. Wednesday’s weaker-than-expected inflation reading—the consumer price index rose just 3% in June from the previous year, below forecasts for a 3.2% increase—has financial markets betting the U.S. Federal Reserve is likely nearing the end of its rate hikes, while other central banks keep raising them.
Advertisement – Scroll to Continue
Deutsche Bank also expects the U.S. to slip into recession, while global economies remain resilient, something that would also weigh on the dollar, which is typically propelled by differences in rates and growth. If Ruskin is right, the euro could be set to rise against the dollar until it fetches $1.15 or even more.
Thankfully, a weaker dollar should be good news for risk assets. While currency moves generally reflect differences in rates and growth, a strong dollar is typically a sign that investors are nervous. It’s no coincidence, then, that the stock market is rising at the same time the dollar is falling, says Macro Risk Advisors technical analyst John Kolovos. “I view the inverse relationship between stocks and the USD as a reflection of risk sentiment,” he explains. “Flight to or away from safety.”
Commodities are among the beneficiaries of that flight to risk. Oil and gold, in particular, are priced in dollars, so when the dollar is falling, their prices rise, all else being equal. And benefiting they are. Futures on WTI crude oil, the U.S. benchmark, gained 1.2% on Wednesday to close at $75.75, the highest level in more than two months. Gold futures, meanwhile, rose 1.3% to $1,956.20, their highest close in nearly a month. The
exchange-traded fund (ticker: GLD) or even the
ETF (GDX), could be good bets if the dollar continues to fall.
Investors should also look to materials stocks, and not just because higher commodity prices could help. 22V’s Roque notes that the
ETF (XLB) and the
Advertisement – Scroll to Continue
ETF (XLI) usually trade together, but while the latter is near a record high, the former is still well below its own record. “It’s a good idea to expect that the XLB is going to attack its former all-time highs…for a near-10% rally from here,” he writes.
When the bough breaks, the dollar will fall, and up goes the market, cyclicals and all.
Write to Ben Levisohn at [email protected]
