The Downtrodden Dollar is Catching a Bid; Here’s What it Means to Stocks and Metals

You know what one of the most successful trades over the past year was? Shorting the U.S. dollar! No matter the economic data, the headlines about President Trump, or just about anything else, the buck was a bust.

But the dollar’s dog days are coming to an end — and that’s going to be a HUGE problem for many investments. Not only that, but the dollar’s upside reversal could also put another dagger in the bull market’s heart. That means it’s time to make some urgent adjustments to your portfolio (if you haven’t already taken my advice to do so!)

Let’s start with a chart. It shows U.S. Dollar Index (DXY) futures. The index tracks the value of the greenback against six major world currencies, with the euro most heavily weighted at 57.6%, followed by the Japanese yen at 13.6%. Next up is the British pound at 11.9%, with the remainder of the index comprised of the Canadian dollar, Swedish krona, and Swiss franc.

You can see that the buck started getting blasted back in December 2016. The DXY topped out at around 104, then proceeded to collapse to 88-and-change.

Not entirely coincidentally, the S&P 500 ramped higher during that exact same timeframe. Two reasons: A falling dollar makes U.S. goods more competitive on the world market, while also boosting the value of sales and profits generated overseas.

But it’s clear that momentum is shifting again. The DXY has already jumped three points in a virtual straight line, breaking above a 16-month downtrend and the 200-day moving average. And it isn’t just leapfrogging the major developed world currencies. It’s also trouncing several emerging market currencies the DXY doesn’t contain.

So, what does a rising dollar mean to you? Well, look at how much the S&P 500 rose in 2017 when the U.S. dollar declined. Is it such a stretch to think, then, that a rising dollar will hurt the stock market? I sure don’t think so.

A rising dollar can also hurt the performance of any mutual funds and ETFs you hold that own foreign assets, as well as U.S.-traded shares of foreign companies. That’s because the value of those foreign assets declines in dollar terms as the buck rises.

Finally, a bouncing buck can weigh on precious metals prices. Why? Gold and silver historically act as “contra-dollar” assets because they’re considered “real money” rather than “fiat money.” When fiat (the dollar) goes down, real (precious metals) goes up. But the opposite is also true — and that’s why gold has pulled back during this recent dollar rally.

My advice?

1. If you haven’t already reduced your stock exposure, don’t wait any longer. This market was already on thin ice, and a rising dollar isn’t going to make things any easier.

2. If you own mutual funds or ETFs that invest in foreign markets, as well as American Depository Receipts (ADRs) of foreign stocks, lighten up. This dollar move looks like it has legs, and the currency translation effect I mentioned earlier is going to hurt their performance.

3. Finally, be prepared for a potentially deeper, short-term pull back in precious metals. The long-term outlook is great thanks to rising fears about inflation and financial stability. But the buck’s bounce could exert downward pressure for a while.

Until next time,

Mike Larson