King Dollar is reigning supreme.
The U.S. Dollar Index – the value of the dollar against a basket of other currencies – is trading at its highest level since February as the American economy appears to be picking up after the winter kicked it in the shins.
Where is the dollar headed next,and what does it mean for U.S. stocks?
Richard Ross, global technical strategist at Auerbach Grayson, says the Dollar Index has remained in trendless range between 70 and 81 for nearly a year.
“The dollar has a pretty good chance to break out above this very well-defined trading range,” said Ross, a “Talking Numbers contributor. “When you look at that chart over the past year, that’s really the key feature here: The dollar has been largely trendless.”
But while a breakout above 81 could mean the start of a bullish trend for the dollar, it could be bad news for U.S. stocks.
“Over the past 10 years, the correlation between stocks and the dollar has been negative, meaning one goes up while the other goes down,” Ross said. “In this case, if we were to see a breakout above that key resistance around 81 – which would project upside to our 83 dollar target – that would project downside perhaps for stocks.”
Gina Sanchez, founder of Chantico Global, agrees with Ross that there’s potential for the U.S. dollar to keep climbing.
“The entire market seems to be short the Euro against the dollar, and that has helped propel this,” said Sanchez, a CNBC contributor. “All you really need is for U.S. growth to outperform European growth. That’s kind of a low bar.”
Sanchez said estimates for second-quarter U.S. GDP growth is coming in at around 3.2 percent, suggesting the economy is picking up. That may be a double-edge sword for stocks.
“That’s not always great for earnings,” Sanchez said. “When you have a strong dollar, that affects all companies that are exporting anything.”
The benefits of higher growth in the United States may be offset by stronger U.S. currency, according to Sanchez. “We’re starting to get out of that Goldilocks scenario we’ve been in for some time,” she said. “We’re starting to deal with the fact that the market is extended. And if you start to hit earnings, that could actually be pretty difficult for stocks.”
To see the full discussion on the U.S. dollar, with Ross on the technicals and Sanchez on the fundamentals, watch the above video.