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Crescenzi: More Dollar Rally Lies Ahead

About a month ago I listed numerous reasons why I felt the dollar was rallying, with one of those being the potential impact of a massive unwinding of commodity-linked trades. I noted that many investors were invested on the same side of the market in a wide variety of commodity-linked trades, a trade that has been unraveling for many weeks now.

Investors have been, for example, long commodities outright, the currencies of countries that benefit from increases in commodity prices, and their stocks and their bonds. In addition, many investors have been invested in countries benefiting cross-border capital flows tied to increases in commodity prices (Eastern Europe, for example, which, according to the BIS, has been a major recipient of money from the Middle East).

Amid the unwinding of this trade, the U.S. dollar becomes a major safe-haven, with investors scorning the currencies of countries either directly or indirectly benefiting from the decline in commodity prices, as well as the currencies of countries that have developed their own set of economic problems — the weakened European countries, for example.

Given the massive scope of the commodity-linked trade, it is reasonable to assume the U.S. dollar will continue to benefit from the commodity correction. The U.S. benefits the most from the correction, because the dollar's strength augments the benefits that the commodity drop will have on the restoration of purchasing power worldwide. It is a major plus for the U.S. financial sector because anything that helps households helps financials, both by reducing the rate of delinquencies and by shoring up ailing balance sheets and reducing the risk of foreclosures.

As money flows into the U.S., money will need a place to go -- and U.S. equities will likely rally and credit spreads will narrow or stop widening.

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Tony Crescenzi
Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."