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How the Dollar's Rise Has Been Killing Equities and Commodities


Now is a good time to start paying closer attention to the greenback.

I've posted quite a few annotated charts that speak to recent US dollar strength, but this one may be the most important. Here and now is a good time for readers to start paying closer attention to the greenback. The recent "pop" higher has the dollar on the edge of a technical breakout. And further, with the equity and debt markets battling uncertainty, the direction the dollar takes over the coming weeks/months will be important to the ongoing 2012 domestic and global market theme.

Over the past month, the dollar has stealthily pushed higher into important resistance, flooring commodities, hitting equities, and adding a strong whiff of deflation to the air. This is nothing new, of course. The inverse correlation of the dollar to equities over recent times has been roundly noted. Take, for example, the performance of precious metals, oil, etc., over the past three to six months. Technically speaking, there isn't a lot of resistance above 82. And further, a breakout would point to the 88-90 area (see annotated charts below).

On the flip side, one day does not a breakout make. A quick move back under 82 would leave the dollar in "undecided" land.

So the question remains: Is this recent poke through resistance a warning to commodities and equities that there is more dollar upside to come? Well, equity/commodity bulls are quietly hoping that this is an overreaction to Europe -- or a head fake of sorts. And most would feel justified arguing that the slowing domestic economy will need more quantitative easing, and this is bearish for the dollar.

But there is that pesky situation in Europe. And further, recent hints at pro-growth initiatives in Europe have helped to stunt recent commodity (and deflationary fears). So, what happens if Europe ultimately capitulates and starts its own printing presses, effectively throwing its hat into the global currency devaluation race? Currency wars, anyone?

There are a lot of moving parts, that's for sure. But until the dollar decouples from its inverse relationship with equities/commodities, I'll be watching closely.

Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market.

Twitter: @andrewnyquist
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No positions in stocks mentioned.

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