Although there is no historical relationship between the dollar and the direction of stocks, these two assets have recently been moving in opposite directions. So what gives?
It’s likely that concern regarding economic growth is driving this relationship. As long as commodity prices rise, the dollar likely falls, as the so-called “commodity” currencies (the Aussie and Canadian dollars, emerging markets) will benefit as raw material prices increase. As global demand grows, the economic outlook gets sunnier and stocks tend to rise.
Inflation worries mayend this inverse relationship. If the dollar continues to fall, consumer prices for imported goods will obviously rise, potentially hampering the recovery.
As I’ve said in earlier posts, we may be near an inflection point for the dollar. If we get some sort of viable plan to eliminate U.S. debt and the dollar rallies, stocks may potentially go in the same direction – which would represent a new leg up for the bull market.