Wednesday, January 24, 2018

Weaker U.S. Dollar - Good for Trade but Toxic for Stocks

In January of 2017 as Trump was inaugurated as President, I published the following article - Will A Weaker Trump U.S. Dollar Be Toxic for Stocks?

Through the first half of 2017, the U.S. dollar (DXY) continued to trade around 100, the level it was when Trump entered office.  But beginning in mid-May 2017 the dollar started to trend progressively lower, and has broken down through a key historical average level of 90.

In an interview in Davos on January 24, 2018, Treasury Secretary Steve Mnuchin reiterated the Trump administration view that a “weaker dollar is good for trade.”   As shown in the real-time capture of the dollar trade at the moment of the remarks, the US dollar dropped, continuing its trend lower.

The relevant investment question is whether a weaker dollar is actually good for stocks (not trade!)?   Against a backdrop of an inversely correlated move in U.S. interest rates, as historical data published in the article shows, chances are very high that the market will collapse as the trend progresses.  There are three points in market history that reviewed in the article – The Nixon Dollar Shock, The Reagan Plaza Accord and the Bush / Snowden Policy. 

I strongly advise that you read the article if you are an investor interested understanding how market risk is fundamentally and rapidly escalating at the present time, and how long it took for the stock market to re-calibrate lower in response to very similar US President direct dollar moves lower in recent history.   Nothing has changed from a market analytical standpoint since the time the article was published.   What has changed is that the US Dollar is now weakening, stocks (SPY) (DIA) (QQQ) are substantially higher, and US interest rates (TLT) (SHY) (TBT) (IEI) are poised to move much higher as the Treasury has to enter the market to finance the Tax Reform Bill not just short-term, but for many years to come. 
Is this a toxic market scenario in the making?  In my opinion, very likely; it is just a question of when for stocks.  And, given that the stock market is starting from an inflated position relative to many market measures, the stock collapses after the post 1971 and 1985 dollar declines are the relative points in history most applicable to the current stock market set-up.

Daniel Moore is the author of the book Theory of Financial Relativity.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.

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