The U.S. dollar traded to another low and stocks rallied.
What else is new?
This feedback loop has been locked into place for months and it’s showing no signs of taking a vacation.
Here’s how it works.
A falling dollar leads to increases in the price of commodities, commodity-exporting country currencies, and commodity stocks. That pushes stocks higher in general.
As stocks climb, investors feel they can/must take on a little more risk. So they sell U.S. Treasuries, the safe alternative when equities and the world in general is looking a little shaky.
Selling those dollar-denominated Treasuries puts a little more downward pressure on the U.S. dollar.
Which pushes commodity prices, commodity-exporting country currencies, and commodity stocks higher, taking stock markets in general higher. And increasing investor appetite for risk.
This loop goes on, in my opinion, until we get either some currently unpredictable scary event that chases money back into Treasuries or until the Federal Reserve signals that it’s ready to raise U.S. interest rates. That move from the Fed would potentially strengthen the dollar.
The first, the unpredictable scary event is, well, unpredictable. The second, an interest rate increase from the Fed, doesn’t look likely in the first half of 2010.
Meanwhile the dollar is trading near a 14-month low against the euro and it set to turn in its third straight weekly decline against that currency.
“Will the Fed really start raising interest rates while unemployment is so high?”
With mounting political pressure for the Fed to raise rates, they can be forced to.
With the selling earlier in the week and today’s selling even with several positive quarterly announcements, do you think we are in store for a short correction even if the general trend is UP until rates are increased?
It seems the market is getting anxious to take profits right now.
Seattlerocks: One of the touighest things in economics is getting the varous lags correct–and the market frequently ignores anyhting that isn’t happening now but that will happen. My analysis refers to a pretty short time period–say the next six to 12 months. Within that period I don’t think stocks will react to the drag that higher oil prices put on economic growth because right now everybody is assuming a recovery in 2010. The danger, of course, is that recovery wioll be weaker than expected (or not arrive at all) because of factors like higher oil prices. That would send the markets down. But that’s a worry for 2010 and hence off the radar screen for Mr. Market now.
not any time soon, but they will have to when the economy gets stronger to curb hyper inflation. You can’t just print trillions of dollars and not worry about inflation.
Is this inflation?
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I think this is what’s missing from the analysis above. Climbing oil costs results in higher and higher costs to a variety of other consumer purchases. Similarly, a weaker dollar increases the costs of imported goods. At some point the market will begin to discount this impact on the economy. In view of the fact we are JUST coming out of a severe recession and our economy – and financial system, for that matter – are still on very shaky ground, the market reaction could be severe. I think investors need to be following these cross currents very, very carefully.
Will the Fed really start raising interest rates while unemployment is so high?
Thanks for the explanation. I’m a boat importer and the falling dollar and climbing stock market has puzzled me greatly. New boat sales stink because they are valued in Euros, while used boat salesin the US are good because they are valued in dollars and both Americans and Europeans are buying them.
Is this inflation?