Don’t look for the stock market bottom until the dollar rally calms down. Here’s why.


It will be difficult for the stock market to stop its slide and find a bottom as long as the US dollar continues to rise against its rivals, according to market analysts.

Global stocks suffered a bruising week, with Friday’s S&P 500 narrowing Avoid its lowest closure of the year. At the same time, a major US dollar index rose to a two-decade high, as the dollar rose against rival currencies and sowed volatility in financial markets.

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After the Federal Reserve raised its key policy rate by 75 basis points on Wednesday, currencies such as the EURUSD,
-1.50%And the
GBPUSD,
-3.59%
and the Japanese Yen USDJPY,
+ 0.69%
It fell further, while the US Dollar Index DXY,
+ 1.50%
Friday rose to its highest level since 2002 and Recorded the biggest weekly progress Since March 2020.

pound It fell to its lowest level in 37 years Against the dollar on Friday, the euro fell below $0.98 for the first time. en price fell to a new 24-year low, ahead of Japan On Thursday, she said she had intervened To support the value of the currency, for the first time since 1998.

Non-US currencies need to stabilize before international stock markets can find a “permanent bottom,” according to Nicholas Colas, co-founder of DataTrek Research. Looking back, a strong dollar in turbulent markets has been a key sign of market stress since the early 2000s, Colas said in a recent note.

However, the relationship between a strong dollar and global market turmoil remains a “chicken and egg” problem, said Brian Storey, portfolio manager at Brinker Capital Investments.

The dollar’s continued rally comes as investors abandon assets seen as risky as they seek havens amid fears of a global recession. Analysts said the dollar’s rally was also partly due to carry trades, where investors borrow low-yielding currencies, such as the Japanese yen, and convert them into higher-yielding currencies, such as the US dollar, to obtain higher interest rates.

The US Federal Funds Rate is currently at a target range of 3%-3.25%, while the Bank of Japan has maintained negative rates.

“As the Fed is getting tighter, fixed income and therefore US yields rising rapidly, that is attracting money into the US,” said Brent Donnelly, president of Spectra Markets. “Then there is also a feedback loop, where higher yields make people anxious and sell stocks, which leads to safe haven buying of the dollar as well,” Donnelly said.

5-Year Cabinet TMUBMUSD05Y,
3.987%
Return on Friday I went to its highest level since November 2007, while the two-year yield is TMUBMUSD02Y,
4.211%
It continued to climb towards its highest level in 15 years.

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How can the dollar’s rise be slowed?

A pause in monetary policy tightening by the Federal Reserve may slow the dollar’s advance. However, with Inflation remains hot And the Fed is resolute in its fight against inflation, that seems a distant prospect.

Federal Reserve officials indicated on Wednesday that they would tolerate a hard landing, with the economy potentially falling into a recession, as part of its efforts to bring down inflation. According to the Federal Reserve’s forecast, the unemployment rate will rise to 4.4% next year, which is 0.7% higher than the current unemployment rate. In history there It was never the case The unemployment rate rose more than 0.5% without the economy entering a recession.

“Until something breaks, perhaps in the credit markets, the Fed will remain hawkish,” Donnelly said. “What ultimately breaks this cycle will be an explosion in credit and stocks that ultimately leads the Fed to send a different message,” he said.

Some investors are also pinning their hopes on collective actions by global central banks to curb the dollar’s appreciation.

Maes McCain, president and chief investment officer at Frost Investment Advisors.

McCain was martyred Plaza agreementa joint agreement signed in 1985 by the world’s largest economies to devalue the US dollar against the French franc, German mark, yen and pound by intervening in the currency markets.

In the current market environment, it may be the safest game for investors to hold a dollar-denominated asset, although they should also prepare for the possibility that the global stock market, or the dollar, will stabilize sometime in the coming quarters, Brinker’s floor.

All three major stock indices ended the week with losses. Dow Jones Industrial Average DJIA,
-1.00%
It lost 1.6% over the past week, ending Friday at its lowest level since November 20, 2020. S&P 500 SPX Index,
-1.72%
It decreased by 1.7%. Nasdaq Composite,
-1.80%
It is down 1.8% for the week.

Next week, investors will be watching the PCE price index, a key inflation gauge, which will be released on Friday.