No matter what you call it – a buck, a single, a one-spot or a greenback – Wall Street stock traders are obsessing over the U.S. dollar.
Pick up any analyst report on stocks, and you will likely find the word “dollar” staring back at you.
Seeking an explanation as to why the price of stocks, oil, gold, copper or virtually any other financial asset is going up or down? Chances are the answer has something to do with whether the U.S. dollar is rising or falling in value vs. other currencies.
Even the recent chatter about another bubble forming seems to end up in a debate about the weak dollar – near a 15-month low – and interest rates near 0%. Bears say investors are using these cheap sources of cash to finance the purchase of riskier assets, such as stocks.
For now, as the dollar goes, so goes the stock market. Stocks rise when the dollar slumps and fall when it’s up. Why are stock investors acting as if they are currency traders?
•Dollar swings move big multinational stocks. A weak dollar is a godsend to big U.S. companies that sell the bulk of their goods abroad. Why? U.S. goods cost less for foreigners, which boosts sales; and sales made in pricier currencies, such as the euro, equal fatter profits for U.S. firms when translated back to dollars.
Companies in the Standard & Poor’s 500 index that garner more than half of their sales outside the U.S. have gained almost 50% this year, vs. a rise of 21% for stocks who companies generate all their sales at home, says Bespoke Investment Group.
And that trend should continue if the dollar remains weak or falls more, says Bespoke’s Paul Hickey.
•Dollar plays are bets on the pace of the recovery. “There are only two trades right now,” says Richard Bernstein, CEO of Richard Bernstein Capital Management. The first, and the trade that’s been working best, is a bet that global growth will improve. If you believe in that thesis, it makes sense to bet against the dollar and buy lower-quality assets with more risk but big potential gains, such as emerging-market stocks and bonds, gold, commodities and small stocks, says Bernstein.
The other trade is based on the belief that “global growth will deteriorate,” he says. In that scenario, betting on the dollar makes sense because it is still a haven in tough times. “The weak dollar is merely the symptom of investors’ willingness to bet on riskier investments rather than … the U.S. hegemony,” says Bernstein.
Some warn that too many investors are focused on currency moves, not fundamentals. Buying riskier assets financed with cheap dollars is “getting crowded,” says trader Michael Panzner: “A little uptick in the dollar could lead to a stampede out of a raft of speculative asset plays.”
(c) USA TODAY
