Sunday, December 8th, 2019

Stocks Are Up Thanks to the Weak Dollar

 

The stock market continues to climb but now the governing factor may be a weakening currency. That is to say stocks are up thanks to the weak dollar. Business Insider writes that stocks are getting a boost from the weakening greenback.

Stocks are back near record highs, and they have a surprisingly weak US dollar to thank.

It wasn’t supposed to be like this.

After President Donald Trump’s shocking victory in November sent the dollar surging into year-end, it was widely expected that it would continue to climb.

Then, amid doubts that the pro-growth agenda floated by Trump would get done in timely fashion, the dollar’s fortune reversed, shocking just about everyone. And it’s done so in spectacular fashion, falling roughly 8% since the start of 2017.

The good part of this is that a weaker dollar makes US exports more attractive and helps manufacturing. It is the weaker dollar that is extending the market rally.

How Far Will the Dollar Fall?

Barron’s writes that the dollar is close to falling off a cliff. They look at the dollar from a technical viewpoint and what they see is not good for the greenback.

If the economy is supposedly strong enough for the Federal Reserve to reduce its balance sheet and begin to raise interest rates, why is the dollar falling? A stronger U.S. economy should attract investment from abroad, and that means there should be an increase in the demand for dollars.

I defer to the economists to ponder this question. When it comes to the charts, though, the dollar is fast approaching a do-or-die level. If it falls below it, there is a lot more room for it to fall before a meaningful floor can be found.

We just posted an article on our sister site, ForexConspiracyReport.com, noting that the options market predicts a falling dollar.

Considering the potential weakness of the greenback, options have become a major factor in both predicting and profiting from the Forex market.

There are a couple of main factors here. One is the EU moving back from its own quantitative easing and the other is the shaky state of the Trump presidency.

Put options on the dollar versus the Euro are protection against a substantial fall in the greenback versus the Euro. The interesting thing is that traders are hedging their bets both ways, up and down. In a risk reversal move traders buy out of the money calls and puts to hedge against a huge move in currency rates. And it turns out that traders are paying more than they have in 8 years to buy this level of protection as the options market predicts a falling dollar. How are the two factors driving the dollar doing?

People who trade currencies for a living are hedging their bets in anticipation of a possible plunge of the dollar. That would be bad for folks still holding greenbacks but stocks are up thanks to the weak dollar and could do even better if the USD fall farther.

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