The U.S. dollar has been sliding for months, potentially creating a different kind of market in 2021.
Currency moves often change the way investors think about stocks. Company fundamentals can lose importance in favor of economics and interest rates. Commodity prices can also become a big deal.
These points are worth learning because currencies haven’t mattered for almost a decade. Some readers may remember the previous global boom between 2004 and 2011, but millions of investors have joined the market since. They’ve mostly seen rallies in technology and megacap Nasdaq stocks like Apple (AAPL), Amazon.com (AMZN) and Netflix (NFLX). But some trends suggest the next few years could be different.
Here are the key points we’ll cover:
- What is the weak dollar?
- What stocks can benefit from a weak dollar?
- Why is the dollar going down?
- How a weak dollar can hurt you financially
What Is the Weak Dollar?
Most currencies fluctuate freely, going up or down based on supply and demand. This can be confusing because some currencies are priced in dollars (like the euro). In other cases, the dollar is priced in the other currency (like the yen).
The dollar index (@DX) simplifies these differences by combining all the data into a single reference point. It goes up when the dollar is strong and down when the dollar is weaker. Yesterday, @DX hit its lowest level in over 2-1/2 years.
U.S. dollar index (@DX), weekly chart.
What Stocks Can Benefit from a Weak Dollar?
A weak dollar typically lifts precious metals and foreign stocks because their underlying assets are priced in other currencies. They can automatically gain value when the U.S. dollar falls.
These are some of the most actively traded securities for a weak-dollar environment:
- Market Vectors Gold Miners ETF (GDX): This holds several gold- and silver- mining companies like Newmont (NEM) and Barrick Gold (GOLD).
- MSCI Emerging Market ETF (EEM): This exchange-traded fund holds foreign stocks including Alibaba (BABA). China, South Korea and Taiwan account for almost two-thirds of its portfolio
- SPDR Gold Trust (GLD): Each share represents about one-tenth of an ounce of gold.
- iShares Silver Trust (SLV): Each share presents one ounce of silver, the highly volatile cousin of gold.
Why Is the Dollar Going Down?
Interest rates are the main driver of foreign-exchange markets. Countries with strong economies often have higher interest rates, creating demand for their currencies. Therefore economic news and forecasts can have a big impact on the U.S. dollar.
The coronavirus recession, plus the Federal Reserve’s low interest rates, have dragged down the dollar. However, the story is more complicated because currencies move in long cycles. The U.S. dollar entered the pandemic near its highest levels in over 15 years, which made it more vulnerable to a pullback.
Conditions have also brightened for other countries. China’s gaining investment and Europe has finally moved past Brexit. That combination of domestic weakness and improvement overseas is helping push the dollar lower.
How a Weak Dollar Can Hurt You Financially
A weak dollar is usually not a problem for most ordinary Americans because our economy is so large. It can increase the cost of travel and some commodities. However it can also boost exports by making U.S. goods cheaper in foreign markets.
What Events Can Move the Dollar?
Events like economic reports and Fed meetings are the main catalysts for the U.S. dollar. This week’s big items will likely be minutes from the last Fed meeting tomorrow afternoon and monthly employment data Friday morning.
Fear can be another big catalyst for the dollar. Political uncertainty, a selloff in the broader market or a crisis like coronavirus often boosts the greenback.
In conclusion, currencies have been a non-story for most of the last decade. But now they could be getting more active.
This article was written by David Russell, TradeStation Securities, Inc., part of the Monex Group Inc, published on 05/01/2021.
David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.