King Dollar is Back

Is there anything more important than the US Dollar these days? We’re on pace for the 10th straight week of gains for the US Dollar Index, a feat matched only once in the history of the index (2014). And for the last few years, the Dollar has had a strong negative correlation with stocks.

We can see how close that relationship was last year. Each time the Dollar rallied, stock prices fell. and each time the Dollar faded, stock prices rallied in relief. For most of 2023, the Dollar was been rangebound, which was all the tailwind we needed for the S&P 500 to climb to new 52-week highs. But the sharp rally in the DXY over the last 10 weeks has restored last year’s relationship.

So what’s next?

In our August technical outlook, we highlighted the resistance area near $105 for the US Dollar. A move above that level, we said, would force us to reevaluate a lot of our opinions about the market. Now that we’re here, we’d be surprised if we just blow right past $105 without any trouble – but we were pretty surprised to see 9 (and maybe 10) straight weeks of gains, too.

The Euro cross comprises a bulk of the Dollar Index, so it’s not surprising that the EUR/USD and the DXY look pretty much the same (assuming you flip one on its head of course). For the EUR/USD longer term, the level is 1.05. If we’re below that, then news agencies will start talking about ‘parity’ again, and the Dollar’s recent rally will get a lot more attention.

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However, the Dollar is already back to last year’s highs if you look at some of its Asian counterparts. In China, the government is working overtime to stabilize a real estate crisis and stimulate faltering economic activity while keeping their currency from falling out of bed. With the Yuan already at its weakest level in 15 years, they have limited options.

And against the Japanese Yen, it’s been all higher highs and higher lows since the January bottom. The Bank of Japan, under the relatively new leadership of Governor Ueda, is unlikely to change short-term interest rate targets at this week’s meeting, as they monitor an increasingly fragile economy. However, Ueda may give further clarity on future plans to end negative interest rate policy. He’s already taken steps toward that end, including raising the cap on long-term interest rates in July, which the BOJ hoped would improve liquidity in that market. Those moves to normalize policy haven’t helped to stem the currency’s bleeding, but a hawkish shift while the Fed, ECB, and BOE are all pivoting toward rate pauses could change the narrative around the Yen.

We’re also keeping our eye on another cross with the JPY. The Australian Dollar is knocking on new highs relative to the Yen after a year-long consolidation above support. The AUD is considered a risk-on commodity currency and the Yen a safe haven. As such, this cross tends to move with global commodity prices. A resolution higher would indicate risk appetite in the currency markets.

This note is an excerpt from our exclusive September FICC in Focus Report. We covered the outlook for oil, gold, silver, copper, interest rates, and more, including more than 30 charts to help our readers stay on top of the most important trends. Contact us to ask how you can read it today for free.

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