Dollar Weakness Driving Commodities, Stock Market Rally

The core problem for the dollar remains that risk appetite is good, U.S. interest rates are extremely low and the Fed has done a good job telling us they will stay low a long time.  The market is under a lot of pressure to seek yield on investments.  There is no yield in the U.S.

– Ray Farris, head of foreign-exchange strategy at Credit Suisse in London

What you are seeing is a broad reallocation of risk.  People who bought T-bills and Treasury notes during the crisis are slowly exiting those positions to buy higher-yielding assets elsewhere, and often those assets are overseas, whether in China, Japan, Brazil, Australia or Europe.

– Rebecca Patterson, global head of foreign exchange and commodities at J.P. Morgan Private Bank

The Wall Street Journal ran a front page story today (“Dollar Sinks To Low For Year: Investors Switch To Riskier Foreign Assets In Gamble On Global Economic Recovery”, The Wall Street Journal, September 9, A1) showing that the dollar is reaching its lowest levels in a year against the euro, a basket of six major currencies and many other currencies.  This is helping to drive the stock market rally as a weaker dollar means more expensive stuff, including stocks.  This adds some credence to the idea that all the money the Federal government is creating is finding its way into the stock market and driving this phenomenal rally.

It also suggests that were the stock market start to sell off and sentiment become more fearful, the dollar would rally and gold would sell off.  Elliot Wave International’s Bob Prechter made just this call in a superb interview on CNBC weeks ago.  I suggest watching the whole thing but he only gets to talking about a dollar bottom at the 4:00 mark.