Why You Should Care About a Falling Dollar

November 3, 2023  |  Michael Reilly

I’ve been getting calls asking why the stock market has “suddenly” bottomed. It didn’t “just happen,” but that’s for another day.

What was the catalyst?

In the end, catalysts are always cited with 20/20 hindsight. In real-time, however, it is often more difficult to see a clear reason.

Except this time.

I can tell you what is causing the stock market to pop in the short run…

A weaker dollar.

Nothing fancy, nothing mysterious or all that difficult to understand.

And yes, let’s toss in a nod to this week’s Fed meeting and Chair Powell’s comments.

But, it’s the dollar. It’s always the dollar.

No matter which party is in control in the U.S., they tend to favor a weak dollar that buoys asset prices and the economy, while a strong dollar “bulldozes” corporate profits and stock prices.

This will become clear in a moment.

It’s not news that the Fed was forced to raise rates and tighten its balance sheet to bring inflation under control.

But are you aware of the result of this policy?

A stronger U.S. Dollar.

And just this week, the Federal Reserve paused its interest-rate hikes.

This means the dollar is near a top because it moves right along with the Fed Funds Rate.

Academics can argue whether the Fed Funds Rate follows the dollar or vice-versa.

The bottom line is that when the Fed cuts, the dollar declines.

We’re already seeing a dollar decline this week without the Fed dropping rates.

I think it’s safe to say, cuts are in our future.

We’re 18 months into the rate hike cycle and this is when we start to see the effects of Fed policy.

So how much longer can it be before the economy shows signs of slowing – forcing the Fed to cut rates?

It’s likely the dollar will be lower a year from now… and that’s good news for your 401k.

So, do you believe in coincidence? I don’t.

At least not when it comes to investing my hard-earned money.

Here’s the U.S. Dollar Index or DXY for short.

I want you to pay close attention to the ups and downs of DXY since this summer – because what the dollar does from here will directly affect the value of your 401k and brokerage account balances.

The DXY bottomed on July 14th. The NYSE and S&P 500 peaked around the same time.

Coincidence? Probably not.

The dollar peaked on October 3rd.

The same day the new low list for the NYSE and S&P 500 index peaked.

Coincidence? Probably not.

And what has the dollar done in the last two trading days? It’s fallen dramatically.

And how have stocks responded?

The S&P 500 has pushed 6% higher and moved to a MACD buy signal with strong momentum in the RSI.


Until next time.

If you’d like to talk more about how Avalon can help you position yourself to be ready for the changing markets, you can schedule an appointment today with one of our experienced advisors who will guide you through our various adaptive investment models.





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