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Does The U.S. Dollar Index Effect The Market Anymore?



February 11, 2011 – Comments (0) | RELATED TICKERS: AA , BAL

Recently, the U.S. Dollar Index has staged a small two week rally. The U.S. Dollar Index made a short term low around the $77.00 area on February 2, 2011. This morning the U.S. Dollar Index is trading higher by 0.33 cents to $$78.59. Usually, when the U.S. Dollar Index rallies higher the major stock market indexes and most commodities will deflate and trade lower. However, the rising U.S. Dollar Index has had very little effect on deflating the stock market over the past two weeks. All of the major stock indexes remain at new two year highs. Most commodities also remain at or near new 52 week highs despite the small rally in the U.S. Dollar Index.

Leading commodity stocks such as Cliffs Natural Resources Inc.(NYSECLF), and Alcoa Inc.(NYSE:AA), remain at new 52 week highs. The iPath Dow Jones-UBS Cotton Subindex Total Return ETN(NYSE:BAL) made a new all time high yesterday and is nearing the psychological $100.00 level The BAL has rallied higher by nearly 200.00 percent since July 2010. The iPath Dow Jones-UBS Softs Subindex Total Return ETN(NYSE:JJS) remains near its all time high as well. Can a stronger U.S. Dollar Index deflate these commodities anymore?

It is important to remember that all commodities are denominated in U.S. Dollars. The U.S. Dollar is the world's reserve currency. However, the Federal Reserve continues to create cash reserves at the banks by purchasing U.S. Treasuries on a daily basis. The daily trading volumes on the major stock indexes have been so light that the small rally in the U.S. Dollar Index seems to have very little effect on the stocks market lately. Generally, the stock market will usually trade directly inverse to the U.S. Dollar Index. Traders can see yesterday and today that the U.S. Dollar Index was higher and the major stock markets are basically trading flat. Is the quantitative easing program by the Federal Reserve Bank that influential on the stock market? The answer to that question is simply YES.

From my observations of following and trading the U.S. Dollar Index over the past years tells me that over time a stronger U.S. Dollar Index will deflate this stock market. This can easily be seen if traders and investors look at a weekly, or monthly chart of the U.S. Dollar Index. In 2001, the U.S. Dollar Index traded around $120.00. Today, the U.S. Dollar Index is trading about 35.0 percent below that high. Keep the U.S. Dollar Index front and center as this is one of the most important charts to follow. Often when the U.S. Dollar Index starts the day strong or sharply higher it will usually fade from its morning high and that is when the stock markets will inflate higher. This will usually occur when the stock market trading volume is extremely light. We shall see it that happens today.

Nicholas Santiago

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