Will a Weaker Dollar Help US Stocks?

The US gave up all of its 2016 gains in one session. According to Bloomberg Business the dollar had it biggest 2 day drop since March on signs of a slowing US economy.

The greenback fell against all of its 16 major peers except the pound, which was weighed down by the Bank of England ’s unanimous vote to keep interest rates unchanged. Signs of a slowing U.S economy have hurt the dollar by derailing wagers on diverging policies between central banks. Currency traders are catching up to the bond market, where 10-year yields sank to the lowest in a year on Wednesday and futures sent the strongest signal yet that traders expect the Federal Reserve to stand pat on rates in 2016.

However, global stocks responded positively and The Wall Street Journal says that a weakening dollar is good for stocks for the time being.

Signs are emerging that upward momentum in the U.S. dollar is fading, which would be good for stocks.

The WSJ Dollar Index fell 1.6% Wednesday as the greenback posted its biggest declines in months against the euro and yen. The cause? A growing view among investors that the Federal Reserve is unlikely to raise rates in March and possibly not even for the rest of the year.

But while shifting opinions on the Fed’s rate policy might have been behind the U.S. currency’s weakening Wednesday, there is evidence that the dollar’s upward momentum has been losing steam for months.

A strong dollar makes US products more expensive in the rest of the world and eventually hurts US industry. This has been the expected outcome of a steadily rising dollar. Will a weaker dollar help US stocks? Investors certainly think so as they drive markets up in a wake of a dollar correction. And the sentiment is not just confined to the USA.

European Stocks Rise on Dollar Decline

CNBC writes about how Asia stocks rise as the dollar pulls back.

Most Asian markets closed up on Thursday, following a mostly higher finish on Wall Street overnight amid an oil price surge.

“The global equity market has become a hostage of oil movement. The correlation is immensely in tandem,” Naeem Aslam, an analyst at AVA Trade, said in a note Thursday. “The strong rally over in the U.S. has also helped Asian markets to secure some gains.”

The take of many investors is that cheaper dollars translate into cheaper oil because oil is denominated in dollars. European stocks also went up on the news of the dollar’s decline. How long will the dollar decline last and for how long will a weaker dollar help US stocks.

Economies, stock markets and currencies are prone to perform in cycles. A weaker dollar makes US products more competitive and stocks rise. The flow of capital into the USA makes the dollar more expensive until traders see the top of the cycle and sell dollars. The dollar declines until manufacturing and exports pick up and the cycle starts again. The US Federal Reserve is probably not going to raise interest rates this year which will also allow the dollar to weaken and US manufacturing to recover.