A Strong Dollar Weighs On Stocks, But Not Only

After a rocky start of the year, the dollar has finally started to perform well. The American currency is getting stronger each day across the board and investors are wondering how will an upward extension affect their current portfolios.

The US dollar index, which measures the greenback’s strength against a basket of six major competitors, was up 0.23 percent at 93.76 by the time of this writing. The world’s most famous currency began its recovery in mid-April after reaching record lows.

What’s moving the dollar?

Of course there is no easy answer for that question, but let’s try to simplify it as much as possible. On a fundamental level, we could mention the following drivers:

• US-China trade negotiations to find a mutually beneficial framework
• Trump-Kim summit about denuclearization in the Korean Peninsula
• Prospects of sanctions against Iran (and a potential response)
• Strengthening 10-year Treasury yields (above 3 percent)
• Low demand for safe-haven assets (gold, yen, euro)
• Federal Reserve plan to increase interest rates at least two more times in 2018

While the dollar is up 3.9 percent since the beginning of April, two of Wall Street’s top indexes are down about 0.3 percent (Dow Jones +2.5%; Nasdaq -0.38%; S&P500 -2.6%).

In this regard, Bank Wealth Management Chief Strategist Terry Sandven says “among the factors that could temper the pace of earnings growth is a rising dollar.”

In other words, investors are not only concerned about stock indexes being under pressure due to the stronger dollar, but also about potential negative effects for Q2 corporate earnings.

Where’s the dollar going now?

Let’s see. US 10-year Treasury yields were comfortably above the psychological 3 percent mark last week, reaching a seven-year high that boosted the greenback’s position. To be honest, it is unlikely to see a reversal in yields in the nearest time.

It is also possible that the Federal Open Market Committee will continue on its path for monetary normalization, rising interest rates a few more times this year. The combination of these two factors seems enough to predict the continuation of the upward movement.

FortFS