The dollar´s dramatic rise is over. So appears to be the U.S. post Great Recession stock market surge. The question is will stocks or the U.S. dollar crash next? Bloomberg Business reports what they call the real story behind the U.S. dollar‘s decline.
One of foreign exchange traders’ favorite rules of thumb hasn’t been working too well.
Currency pairs tend to loosely track the difference between yields on the two nations’ short-term sovereign bonds, often the two-year maturity. But that axiom would’ve impoverished anyone trading the Japanese yen against the U.S. dollar this year.
The world’s reserve currency is being driven not by nominal yield differentials but real ones; that is, interest rates adjusted for inflation.
This isn’t a new phenomenon, but rather the re-establishment of a relationship that’s proven more reliable over the long haul.
The correlation between 10-year Treasury Inflation-Protected Securities and the Federal Reserve’s real U.S. dollar trade weighted index is stronger than relationships between real yields and the nominal dollar index or nominal dollar index and yields.
Thus, as long term yields remain low the dollar will continue its current slide. And stocks should rejoice because a stronger dollar has hurt U.S. exports. But what happens if the Fed raises interest rates more than expected?
Whose Bear Market Is Next?
Investing.com predicts a bear market for stocks or the dollar.
On January 25, 2016, the dollar index, which measures the greenback against a basket of six major currencies, hit a short-term high of 99.52. Since then, it dropped to a low of 93.62, which was a drop of 6%. The decrease in the dollar was the primary contributor for the rebound in the major averages. Investors sold dollars because Fed Chair Janet Yellen backed away from her previously threatened four rate hikes during 2016.
The fall in the dollar provided crucial support to global markets by boosting distressed commodity related debt held by financial institutions, improved the projected earnings of U.S. multinational corporations and also bolstering banks’ holdings of dollar-denominated foreign debt.
The Fed is currently looking at just two interest rate hikes this year which should allow stocks to have a breather and even advance a bit but if the Fed decides that the U.S. economy and the threat of inflation warrant more increases the dollar could recover and stocks continue to sink. Unfortunately the stock market is in bubble territory and without a weakening dollar stocks are likely to correct dramatically. Thus we wonder will stocks or the dollar crash next.
Is This the Moment for Buying Gold?
When stocks and the dollar are both in trouble gold often rallies. Gold is up to $1,300 an ounce. The Financial Times suggests five factors to watch for gold.
Gold has enjoyed its best start to a year in three decades, climbing more than 20 per cent. The advance has attracted some of the world’s most sophisticated hedge funds but can it be sustained without a pick-up in physical demand from the world’s two biggest consumers – China and India? As gold trades around $1,300 a troy ounce, here are five things to watch for curious investors and gold bugs alike.
Their suggested factors to watch are the Fed and interest rates, the dollar, China and India because of their economies and because they a big gold buyers, investor demand in the West including hedge funds and a Brexit as gold might get a boost if the UK leaves the EU.