DOLLAR INDEX FALLS TO THREE-MONTH LOW -- THAT'S BOOSTING COMMODITY PRICES WITH GOLD IN THE LEAD -- A WEAK DOLLAR IS ALSO BOOSTING RELATIVE PERFORMANCE OF FOREIGN SHARES -- ESPECIALLY EMERGING MARKETS
DOLLAR INDEX FALLS TO THREE MONTH LOW... The U.S. dollar has come under heavy selling pressure. Chart 1 shows the Dollar Index Fund (UUP) tumbing to the lowest level since last October. That's giving a boost to foreign currencies which are gaining ground today. That includes both developed and emerging market currencies. The falling dollar is also giving a boost to commodity prices like crude oil. As is usually the case, however, precious metals are getting the biggest benefit. Chart 2 shows the Invesco DB Precious Metals Fund (DBP) trading at the highest level in more than six months after clearing its 200-day moving average. The DBP includes gold and silver prices which are both rising. Gold, however, has gotten the bigger boost. The orange bars in Chart 3 shows the Gold SPDR (GLD) reaching the highest level since last June. The gray histogram bars show the Silver iShares (SLV) also rising, but at a slower pace. Gold and gold miners have been attracting more attention since U.S. stocks started falling during the fourth quarter and interest rates started dropping. A more dovish Fed reduces the odds for rate hikes this year which is also hurting the dollar. And this week's drop in the dollar makes gold assets even more attractive.
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Chart 1
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Chart 2
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Chart 3
FALLING DOLLAR BOOSTS FOREIGN DEVELOPED STOCKS ... A rising dollar over the past year favored U.S. stocks over foreign shares. A weaker dollar now is having the opposite effect. The blue line in Chart 4 is a ratio of MSCI EAFE iShares (EFA) divided by the S&P 500 since last spring. [EAFE includes foreign developed countries outside of North America]. The falling blue ratio shows foreign developed stocks underperforming the U.S. last year while the U.S. Dollar Index (green line) was rising. Since December, however, the peaking dollar has caused the EFA/SPX ratio to rise. In other words, foreign developed shares have done better than the U.S. since the start of December. Emerging markets are getting an even bigger boost.
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Chart 4
EMERGING STOCKS AND CURRENCIES ARE RISING ... The red line in Chart 5 is ratio of Emerging Market iShares (EEM) divided by EAFE iShares (EFA) since last spring. The rising ratio since October shows emerging market stocks rising faster than foreign developed shares. That's because emerging market stocks usually get a bigger boost from a weaker dollar. So do emerging market currencies. The green histogram bars in Chart 5 shows the WisdomTree Emerging Currency Fund (CEW) rising to the highest level in six months as well. That's a more direct effect of a falling dollar, but also increases the appeal of emerging market stocks. That's because EM stocks and currencies usually trend in the same direction. A more dovish Fed and a weaker greenback (combined with weaker U.S. stocks) appear to be pushing global funds back into foreign shares, and emerging markets in particular. It remains to be seen if those money flows into foreign markets are coming at the expense of U.S. stocks.
