GO
Loading...

Dollar and Stocks Could Be Ready to Part Ways

Thursday, 6 Jun 2013 | 1:07 PM ET
Getty Images

That love affair between the stock market and dollar this year appears to be heading for the rocks.

The two entities have moved in tandem, breaking a pattern that had been prevalent since the Federal Reserve began its aggressive easing measures that helped keep the U.S. currency weak against its global trading partners and the equity markets strong.

But with expectations dimming that the Fed is planning an early exit, the dollar likely will lose some of its momentum as the central bank maintains its low interest rate posture and quantitative easing program.

(Read More: Housing Grows, Hiring Slow, Sequester Hits: Fed)

"The dollar was going up because people were of the mindset the Fed was imminently going to exit their QE strategy," said Michael Pento, head of Pento Portfolio Strategies and author of the newly released "The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market" (Wiley).

"Now the state of bad news, or less good news, has put some question between what ... Japan is doing and what (Fed Chairman Ben) Bernanke is doing here. I never held tight to the theory that the dollar was going to soar because the Fed was going to start unwinding its balance sheet."

Indeed, economic news lately has ranged from mediocre to weak, which could reinforce the Fed's conviction to hold its key rate near zero and to continue to pump $85 billion a month into the economy through asset purchases.

So would dollar weakness pull the stock market with it, since the two have been tightly correlated this year?

Not necessarily, though it certainly worked that way Thursday.

"Looking at the charts of both, clearly on a long-term basis the dollar is weaker than the [Standard & Poor's 500]," said Tracy Knudsen, senior market analyst at Lowry Research. "We do think that stocks are in a strong position."

(Read More: 'Dr. Boom'? Roubini Sees Two Years of Stock Gains)

The stock index has lost about 3.5 percent over the past two weeks and the dollar index, which measures the currency against a basket of its global counterparts, has dropped about the same amount.

Bond yields had popped as well and have moved lower with stocks and the dollar.

Interestingly, the tight correlation is not an automatic negative for stocks.

History has shown that when the movements are this closely entwined, the one-month market returns are minus 0.37 percent, but long-term the market rises 2.83 percent over the next three months and 13.77 percent over the next six months, according to Bespoke Investment Group.

Wall Street continues to be bullish on stocks, meaning this year's trading pattern would have to end.

The Euro's Great Levitation
CNBC's Rick Santelli and Mark Grant of Southwest Securities talk about how the ECB's rate policy is impacting the euro, and what's behind the rally in the pound.

S&P Capital IQ, for one, raised its 12-month price target on Thursday from 1,670 to 1,780 on belief that multiples will continue to expand, while Strategas upped its earnings expectations from $96 to $102.25.

Amid that optimism, though, Thursday's trading action saw the dollar index fall 1.4 percent by midway through the session while stocks dropped about half that much. The greenback came under major selling pressure against the yen, which rose 3 percent.

(Read More: Rising Yields May Stifle Boom in Dividend Stocks)

"We were just overbought on a short and intermediate-term basis. We're overdue for a correction," Knudsen said. "It's been a rough ride these last 10 days. We could see a further washout in selling before we get to a bottom. ... We could see that occur before making another move to the upside."

Pento believes the Fed's actions are destructive over the long term because of inflation dangers, but he, too, thinks the market in the near term will brush off the Fed fears and move higher.

"The retreat of the dollar is going to be indicative of the fact that the Fed is not going to be able to unwind its balance sheet. That's going to be a buying opportunity for stocks in the short term," he said. "Of course, it's very deadly in the long run."

_ By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.

  Price   Change %Change
USD INDEX
---
S&P 500
---

Featured

Contact Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More