Looking at Currency: Be Careful
Board: Macro Economics
The USD index has popped over the passed few days to 83.06 (only a hairsbreadth away from its 52 week high of 84.04). The Japanese yen is on fire and has dropped (inverse, so higher is lower here :-) from a yearly high of 77 to nearly 102 right now! The Australian dollar has just hit parity (as has the Canadian Loonie). The Euro has dropped slightly (by about 1%), but is somewhat stronger against the Swiss Franc (at 1.24), so here's my read:
Japan is buying bales of US dollars and a somewhat lesser amount of Euros. This is distorting the foreign exchange market. Japanese stocks will soar. There may be a carry trade of yen finding a home in higher interest Australia, but the drop in Aussie valuation currently doesn't support this.
While Japanese stocks will go up in terms of Yen, it is important to realize that there will be a headwind in terms of a rising USD for Americans. If the Yen were to rise to 115 or 120, things could "get interesting".
IN THE MEANTIME: A rising dollar will make US stocks attractive abroad (outside of Europe anyway), but it will make it much more difficult for US firms to be competitive against Japanese products. This rise in the Yen can be a pail of cold water thrown on the US equity market over the next few months (especially if the Japanese stocks overtake their currency risk).
Not predicting here, but saying you should start paying close attention.