Investors should keep a close eye on exchange traded funds indexed to the dollar’s movements as a rally in the greenback would likely crush commodities and provide a headwind for stocks.
Oil and U.S. stocks were selling off Thursday while the Dollar Index rallied nearly 1% along with PowerShares DB US Dollar Index Bullish (NYSEArca: UUP). The ETF seeks to replicate the performance of the dollar against a basket of currencies that includes the euro and yen.
Stocks have been inversely correlated with the dollar in the credit crisis and aftermath amid the Federal Reserve’s unprecedented intervention to get the economy back on its feet. [Why are Stock and Dollar ETFs Falling Together?]
Gold, oil and other commodities priced in dollars also feel the pressure when the greenback strengthens. [Dollar Rally Tarnishes Metals ETFs]
The European debt crisis is certainly helping to drive the dollar higher as the euro weakens.
Some technical analysts are looking for a bounce in the dollar because it’s been so beaten up, and because so many speculative traders are betting against the dollar.
“Some market participants had speculated that the Fed might signal a further credit easing since the U.S. economy has been faltering,” said Etsuko Yamashita, chief economist at Sumitomo Mitsui Bank, according to a Dow Jones Newswires report. “But the fact is it didn’t. And the outcome induced short-covering.”
The Dollar Index and ETF deserve close attention as the recent “higher lows” may indicate a trend change.
Dollar Index
Chart source: StockCharts.com.
PowerShares DB US Dollar Index Bullish
