The 2008 global financial meltdown and Europe’s lingering sovereign debt crisis have conditioned investors to see a rising U.S. dollar as a bad sign for stocks.
However, that doesn’t mean the U.S. dollar and stocks can’t rise together, as they have in the past.
Investors will be keeping a close eye on the correlation if PowerShares DB US Dollar Index Bullish Fund (UUP) breaks out to its highest level in three years.
The ETF follows the performance of the greenback against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
The currency fund has been strong in recent weeks on speculation the Federal Reserve may dial back on monetary easing. [Dollar ETF in Two-Day Surge After Bernanke Comments]
A rising dollar has also been a headwind for gold ETFs. [Gold ETFs Lose Luster After June Nonfarm Payrolls Report]
“You have this bullish macro-fundamental backdrop for the dollar, and certainly we’ve seen that in the price action,” Niall O’Connor, a at JPMorgan, told Bloomberg. “But now we have these next technical hurdles in play that I think we’ll still need to break through to really confirm what we’re seeing.”
UUP, the dollar ETF, is up 5% year to date.
“The dollar’s strength over the course of last week was especially swift, I think the speed was overdone and so this setback is normal,” said Ulrich Leuchtmann, head of FX research at Commerzbank, in a Reuters report. “Now markets are positioned to take profits from these moves, but this is simply a pause.”
Further strength in the dollar wouldn’t necessarily be a negative signal for U.S. stocks.
During the financial crisis and aftermath, the dollar tended to spike during risk-off bouts in the market. But since mid-2011, the U.S. dollar has shown a high correlation with the S&P 500, according to Kimble Charting Solutions.
PowerShares DB US Dollar Index Bullish Fund
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.