Eyes on the dol­lar with stocks out of the hole

The Pak Banker - - MARKETS/SPORTS -

US stock mar­ket in­vestors will be watch­ing cur­rency mar­kets next week for signs that the re­cent, re­lated trends of a weak­en­ing dol­lar and a strength­en­ing stock mar­ket will con­tinue.

Af­ter a his­tor­i­cally bad start to the year, the Dow and S&P 500 both moved into pos­i­tive ter­ri­tory this week, in part on ex­pec­ta­tions that a 3-week move down by the dol­lar could buoy cor­po­rate prof­its and share prices.

Many in­vestors had been con­cerned over the dol­lar's strength, as it can crimp ex­ports, earn­ings and eco­nomic growth. Be­tween Sept. 17 and mid-Fe­bru­ary, the dol­lar had risen more than 2 per­cent against a bas­ket of ma­jor cur­ren­cies, as the U.S. Fed­eral Re­serve em­barked on a tighter pol­icy while other cen­tral banks were eas­ing.

But the S&P 500 .SPX has ral­lied about 9 per­cent off its Feb. 11 low to pull the in­dex into pos­i­tive ter­ri­tory for the first time this year, fu­eled in part by a drop in the dol­lar .DXY, which has fallen more than 3 per­cent over the last three weeks.

The dol­lar's losses ac­cel­er­ated this week in the wake of the Fed's pol­icy state­ment on Wed­nes­day, which cut pro­jec­tions for the num­ber of in­ter­est rate hikes this year in half. The dol­lar suf­fered its big­gest two-day drop in six weeks fol­low­ing the an­nounce­ment.

That drop helped pro­pel sharp gains in oil CLc1LCOc1 prices, back above the $40 mark for the first time this year, in turn lift­ing en­ergy shares. "Af­ter we get through this two-day hic­cup, the knee­jerk to the pol­icy move, I would ex­pect the dol­lar to re­sume its rally," said Michael O'Rourke, chief mar­ket strate­gist at JonesTrad­ing in Green­wich, Con­necti­cut, who high­lighted the dif­fer­ence in US in­ter­est rates ver­sus the ECB and Bank of Ja­pan.

"Our pol­icy rate is go­ing one way, theirs is go­ing the other way, that spread is go­ing to con­tinue to widen, no mat­ter what." But Thomas Lee, man­ag­ing part­ner at Fund­strat Global Ad­vi­sors in New York, ex­pects the dol­lar to con­tinue to weaken as he be­lieves it is more tied to in­fla­tion than cen­tral bank poli­cies. With dol­lar strength and oil weak­ness a head­wind for eq­ui­ties in 2015, Lee feels the re­ver­sal of those moves should be a ben­e­fit for stocks.

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