Thursday, April 2, 2009

Weaker dollar, stronger equities?

I've posted this chart before, and here it is again, updated. I still don't have a good explanation for why a weaker dollar is good for equity values. Maybe it's that when things look bad for the economy, it increases the demand for dollars as a safe haven. Now that things aren't looking quite so bad for the economy, the dollar slips and equity prices rise. Today's dollar slide appears to be the result of the ECB cutting their interest rate target by only 0.25% (to 1.25%), which was less than expected. The ECB's reluctance to follow the Fed into full panic mode suggests that perhaps things aren't quite as bad as is generally believed.

And indeed, I don't think things are so bad. Lots of things have bounced recently: auto sales were up in March, commodity prices are inching higher, home sales are up, the ISM manufacturing index is up three months in a row, and of course equities are up for the past three weeks.


fboness said...

Stocks adjust for inflation?

Zimbabwe's stock market was the best performing in the world in nominal terms even as the currency went out of control.

Sumit Punglia said...

fboness has a good reason for a rising stock markets with a weaker currency.

Markets are showing inflation period ahead.

Mati Vivaldi said...

In my opinion it's all a question of relative prices: stocks are assets priced in dollars. If those dollars start to worth less then you need more dollars to buy the assets.

Remember 'the run for safety' that has been with us for the past year? well the winds are starting to turn... :)

dc said...

Wouldn't it be at least partly because of these reasons:
- A weaker dollar makes domestic products more competitive in foreign markets, and therefore stimulates sales and increases earnings;
- A weaker dollar makes US equities seem less expensive and therefore more attractive to foreign investors?

Scott Grannis said...

Inflation is typically bad for stocks (not always though). Suppose you knew that the dollar would lose half its value over the next year: would you be more or less interested in buying stocks? I think it's clear your desire to buy stocks would decrease, because they are not likely to produce the same return as tangible assets, which would tend to rise in price in proportion to the dollar's decline.

Stocks are assets and currencies are assets. You can't escape that fact, because you can buy stocks and hedge the currency risk that is attached to stocks.

Bernard said...

Higher expected future inflation coupled with a bear market rally?

Sumit Punglia said...

Inflation, if happening because of monetary policy is good for stocks. However, inflation because of OPEC cartels, or a general downfall in productivity is bad for stocks.

If dollar is going to loose half of its value, only being in equities can protect it.

If monetary easing leads to inflation, tangible assets will always rise lesser than the equity of the company which is producing that tangible asset.s