Ned Davis Research analysts warned in a report last Friday that stock market investors need to closely monitor the movement of the dollar, as history shows that a strengthening dollar may hinder further gains in the stock market.

Currently, the strong dollar seems to be pausing, ending an eight-week streak of gains. The dollar has continued to rise this autumn due to surging U.S. treasury yields, which reflect strong economic data, and concerns that the incoming Trump administration's trade agenda and fiscal plans may exacerbate inflation worries, thereby limiting the Federal Reserve's room for further rate cuts. The dollar's rise also reflects market expectations that these policies will boost the economy, allowing the usa to continue outperforming other countries.

NDR strategists Veneta Dimitrova and London Stockton noted that a strengthening dollar is beneficial for the economy, which usually means falling prices for oil and other commodities, having a disinflationary effect, often reducing inflation expectations, boosting consumer confidence, and acting as a "magnet" for foreign investment, which supports capital expenditures and helps the usa treasury finance its growing government debt.

Meanwhile, the dollar's momentum does not seem to have significantly impeded the stock market's rebound, with the s&p 500 index and the dow jones industrial average continuing to hit new highs. The s&p 500 index has risen more than 26% so far in 2024.

However, it is not all good news; a stronger dollar makes usa exported goods more expensive for foreign buyers, which may harm company profits. Analysts pointed out that this will also widen the trade deficit and suppress economic growth.

NDR analysts noted that profits from abroad account for a small but important proportion of overall usa corporate profits, with the share of foreign profits dropping from over 20% before the pandemic to about 12% now.

They wrote, "While this may seem like a trivial proportion, a stronger dollar may still negatively impact earnings and stock prices." They noted that this negative impact on stock prices could also lead to company layoffs, thereby slowing economic growth.

Meanwhile, the one-year rolling correlation between the trade-weighted dollar index and the s&p 500 index is approximately -0.4. A correlation of -1.0 indicates that the two assets move in completely opposite directions, while a correlation of 1.0 means they move in perfect synchronization; a zero correlation indicates no relationship between the movements of the two assets.

They stated: “In fact, the negative correlation between the dollar and the s&p 500 index suggests that a stronger dollar may pose a challenge to the stock market.”

Editor/Lambor