The pink line in the chart above (click for greater detail) shows the cash S&P 500 Index from 2000 to the present. The blue line is also the cash S&P 500 Index, but adjusted for the value of the U.S. Dollar Index. The dollar has been weakening as stocks have risen. As a result, the bull market in large caps since 2003 has been far more anemic in world currency terms than in dollar terms. With growing calls for interest rate cuts, that doesn't bode well for the dollar, and that invites questions about who would want to own dollar-denominated assets when the dollar is shrinking.
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6 comments:
This is a terrific point, Doc. We just returned from two weeks in Europe. Every time I changed money I felt like I was being mugged. By the way, I read your blog almost everyday. It's one of the best out there. Thanks a million for all of your creativity and knowledge.
Thanks, Michael; I appreciate the comment and the support. The dollar is violating some long-term support, and that is potentially worrisome.
Brett
Yes, quite. Looking at the DXY its already closed below the Dec '04 lows several times. What can we use as a guide at this point?
The dilemma for the FED is that if they lower interest rates, it will cause a dollar weakness which will cause a sell off in the bond and broad market.
http://www.stockroar.com/2007/09/11/the-us-dollar-inflation-and-gold/
Hello Michael,
Looking at individual crosses may provide some guidance, esp Yen and other weak currencies.
Brett
Hi Brian,
I think you're right: the Fed truly has a dilemma here, given the weak dollar and the liquidity/credit concerns. Defense of the dollar and inflation fighting would be a short-term disappointment for equity traders.
Brett
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