The 13-day rally in the U.S. Dollar Index heading into Thursday’s action is a clear signal that investors startled by Greece’s spiral are hunkering down in cash and specifically the greenback.
ETFs that invest in stocks and gold have been punished by a rising dollar this month as the euro dives on fears Greece is about to leave the euro. Government bond markets in Spain and Italy are also under renewed pressure.
However, the technical picture for the U.S. dollar suggests equity and precious metal ETFs are due for a bounce. The dollar is hitting a key resistance level, while speculators are extremely bullish on the currency. [Dollar ETF Threatens Breakout]
“We think that for the stock market to bottom, we have to see some relief from the persistent strength in the U.S. Dollar Index, which may be seen in the weeks ahead,” says S&P’s U.S. Investment Policy Committee in a note this week. “The dollar index is very overbought, in our view, and is at key chart resistance. In addition, sentiment toward the greenback has recently jumped to a bullish extreme, which has been associated with tops in recent years.”
On Thursday, the dollar index was up for the fourteenth straight session, the longest rally since at least 1985, MarketWatch reported.
In currency ETFs, PowerShares DB US Dollar Index Bullish (NYSEArca: UUP) is up sharply in May.
“Greek residents have withdrawn over €700M from banks since the May election, and a bank run won’t wait until the June election. Logic would therefore dictate that Greek politicians need to become more centrist in their thinking before the situation deteriorates further,” S&P said.
“Yet the inability of equities to mount more than an intraday counter-trend rally, combined with the ongoing decline of oil prices, the seemingly endless surge in Treasuries, and the continual collapse in gold as investors seek the liquidity of cash, speak, we think, to the massive risk should the contagion spread,” the committee noted.
PowerShares DB US Dollar Index Bullish