Dollar Strength Is Killing Stocks & Commodities

Jeff Macke

I've been talking about the relationship between the U.S. Dollar and the stock market, not to mention commodities, for months on Breakout. I mean a lot. Almost obsessively, really. The theme has been "Strong Dollar = Weak Stocks" and vice versa. It's been a point worth making, as evidenced by the price action again today with the dollar stronger against the Euro as stocks fall.

According to Clark Yingst, chief market analyst at Joseph Gunnar, the relationship between the dollar and the euro is the market tell of 2011, dominating the tape to the point that other fundamentals are being all but ignored. Yingst says the ratio is getting whipsawed by "the latest reports and rumors emanating from Europe and that's the indicator of the direction U.S. stocks are going that day".

Yingst says market reactions to earnings reports have been strictly company specific, with all other implications for the rest of the respective sectors. Pointing to IBM (IBM), Yingst says weakness in Big Blue's core businesses "should" have impacted competitors. When an industry leader like this sees weakness in core segments, the news typically puts a dent in related stocks. Instead companies such as Hewlett-Packard (HPQ) moved higher off IBM's results, carried along with the rest of the tape and, not at all coincidentally, a weak dollar.

According to Yingst dollar strength is likely to persist. In September there "appeared to be a real breakout, technically speaking, in the dollar/euro." Pointing to a break of the dollar's 2-year downtrend as well as the 200-day moving average, Yingst forecasts near to intermediate term strength.

"Given the inverse relationship between the dollar/euro and the S&P500, that's a negative for stocks," Yingst concludes.

Are you paying attention to the EUR/USD or is all this currency and technical stuff a bunch of noise? Let us know what you think in the comment section below.

View Comments (220)