Dollar’s upside breakout isn’t enough by itself to sink stock and commodity prices
The dollar index on Wednesday posted a 5-month high and has now rallied by a total of 6% from February’s 3-1/2 year low. Meanwhile, EUR/USD posted a 5-month low this week and has now fallen by a total -6% from March’s 3-1/2 year high. USD/JPY this week rallied to a 4-month high.
The 3-month-long rally in the dollar index has turned the medium-term trend bullish and appears to have broken the back of the 2017/18 sell-off. The dollar’s recent rally has been due to the Fed’s relentless rate-hike regime and its balance sheet draw-down program, which is in direct contrast to near-zero policy rates in Europe and Japan and the ongoing QE programs by the European Central Bank and Bank of Japan.
The strength in the dollar can also be traced to weakness in the euro and yen. The euro has seen weakness due to the recent spate of weak Eurozone economic data and the Italian political uncertainty with the incoming populist government. The yen has seen weakness as doubts have arisen about the longevity of Prime Minister Abe, and Abenomics in general, due to his recent land scandals.
The dollar index may well continue to rally in coming weeks if the fundamentals continue to lean in the dollar’s favor. However, we do not expect the strength in the dollar to cause any major problems for commodity prices or the stock market.
The stronger dollar is obviously a negative factor for the stock market since it reduces the value of repatriated earnings and crimps exports. However, the stock market has more important things on its mind right now such as trade tensions and this week’s surge in the 10-year T-note yield above 3.00%.
The stronger dollar is also an obvious negative for commodity prices. However, the strong dollar has not been much of an impediment as yet considering that the Bloomberg Commodity index is trading just below April’s 2-1/2 year high.
Moreover, the commodity markets are currently moving mainly in response to commodity-specific factors. For example, WTI crude oil prices on Thursday rallied to another 3-1/2 year high as the market looks forward to a supply crunch caused by a steady drawdown in Iranian oil exports with the reinstatement of U.S. sanctions. Aluminum continues to see support from the U.S. sanctions on Rusal. Industrial metals prices in general are seeing support from solid global economic growth. Grain markets are seeing support from weather factors and a drawdown in global inventories. Hog prices have been roiled by the Chinese tariff on U.S. pork exports. Softs are moving mainly on weather-related factors.
There are so many larger factors in play at present that we view the strength in the dollar as only a minor negative factor for both commodity and stock prices.