WHY A RISING DOLLAR ISN'T GOOD FOR COMMODITIES AND STOCKS AND MAY MEAN A WEAKER GLOBAL ECONOMY

DOLLAR INDEX ACHIEVES BULLISH BREAKOUT ... The US Dollar Index broke out on Thursday to a new 2005 high. It also broke through its 200-day moving average. I discussed a more positive outlook for the dollar's intermediate-term trend on Wednesday and some ripple effects an upside breakout would have on other financial markets. The most obvious (and immediate) effect was a breakdown in gold and other commodities. Chart 2 shows gold violating its 200-day average on Thursday in a mirror image of the dollar's upside breakout. Most other commodities fell as well (including oil). The result was a nearly 5 point plunge in the CRB Index to the lowest level in three months. The biggest percentage loser was copper. That carries some negative implications for the global economy. Just recently I wrote about how weakness in Phelps Dodge was hinting at a copper top, and why a copper top could be signaling a global slowdown. That's because copper is a good barometer of global economic strength or weakness. The rising dollar is also putting downside pressure on crude oil. Chart 4 (plotted through Thursday) shows crude threatening its 200-day line. The recent breakdown in basic material and gold stocks gave an early warning of commodity weakness and dollar strength. [Commodity stocks (like gold) usually lead the commodities]. Since commodities are usually the last asset class to peak, I take their recent downturn as a negative sign for the economy and the stock market.

Chart 1

Chart 2

Chart 3

Chart 4

WHY A RISING DOLLAR ISN'T HELPING STOCKS ... On Wednesday, I showed the dollar and the S&P 500 trending in opposite directions for the last two years. Yesterday's dollar breakout saw a big drop in stocks (on rising volume). I believe that the dollar's bullish breakout was sparked by Wednesday's announcement of the big drop in the U.S. trade deficit in March to the lowest level in six months. Why isn't a falling deficit good for stocks? Here's my reasoning. The drop in the March deficit was based mainly on a big drop in U.S. imports. [While exports rose $1.5 billion, imports fell by $4 billion]. One chief economist was quoted as saying that the rise in the dollar was proof that the U.S. economy was accelerating. I'm not so sure about that. The drop in imports was based on a drop in U.S. consumer spending. That would be consistent with today's report that U.S. consumer sentiment fell to the lowest level in two years. In other words, the trade deficit didn't narrow because foreigners bought more U.S. goods (which would be good). It fell because U.S. consumers bought fewer foreign goods (which is bad). It's bad because the U.S. is the strongest of the major global economies. Our buying of foreign goods has kept the global economy afloat. If Americans stop buying foreign goods, the global economy weakens. That helps explain why the dollar is suddenly rising. It's not because of U.S. strength, but because of foreign weakness. Currency trends are based on relative valuations of global economies. Dollar strength doesn't mean the U.S. economy is strong; it means that we're just stronger than the others. But all are weakening. The fact that import prices have been rising is another reason why imports have fallen. That's a sign of global inflation, which isn't good either.