Fed Stance Should Strengthen Dollar

Fed Stance Should Strengthen Dollar

When we look at the relative performance of the US Dollar compared to some of its most commonly traded counterparts, some very clear declines can be identified.  This has been especially true when we look at the Euro and British Pound.  But whether or not these trends can continue is a completely different story, as there is a confluence of events that should lead to a turning point in the greenback.

Perhaps the easiest way of explaining this is to simply assess the GDP growth rates in each of these regions, as it is now clear that the US economy is firmly ahead of the pack when using this measure.  But markets will also have to contend with the changing stance at the Federal Reserve, which should lead to an end in quantitative easing (QE) stimulus before the end of this year.  This is a positive for investors that are long on assets like the PowerShares DB US Dollar Index Bullish ETF (UUP).

Potential Losers

But this is much less encouraging for those that have significant exposure to stocks in both developed and emerging markets.  This means that those long the SPDR S&P 500 Trust ETF (SPY) or the iShares MSCI Emerging Markets Indx ETF (EEM) should proceed with caution and consider taking profits while stock markets are still trading at their elevated levels.  “Many voting members of the US Federal Reserve have signaled the intention to abandon stimulus programs before the end of the year,” said Rick Bartlett, markets analyst at Orbex. “But this will have a different impact on markets, depending on which assets you are watching.”

In commodities, for example, declines will also be expected.  Oil markets as measured by the United States Oil Fund LP ETF (USO) have already started to feel some of the effects, as have those that are most focused on precious metals.  Both the SPDR Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SLV) have had trouble posting anything resembling a rally even after markets have been given bargain prices after last year’s bear trends.

With all of this in mind, it is clear that there are few potential winners as the Fed starts to implement new policy changes that will allow the US economy to function more on the basis of its own merits.  Stock investors will need to take companies on a case by case basis, as there is now clear potential for disappointments in earnings results into the final months of this year.  This, of course, does not mean that all US companies will be negatively affected.  But the potential for downside it more clear now than it has been for the last few quarters and it makes sense to start positioning for these changes before they occur.  The stated policy stance from the Fed stands to benefit the Dollar more than most other assets

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