×

As the dollar makes a comeback, stocks could take a hit

The U.S. dollar is beginning to enjoy a bullish turnaround after declining for much of this year, and some strategists are watching for how its recent gains will impact equity markets domestically and abroad.

The dollar has moved higher over the past three weeks, pointed out Matt Maley, equity strategist at Miller Tabak. Indeed, the dollar index rose to its highest level in about seven weeks on Tuesday, trading up near its highest level since mid-August (just below the 94 mark) before giving up some of its gains. Should the index break above 94, it will have seen its first "higher high" of the year, Maley said.

"Any meaningful move above that level would signal that the intermediate-term trend in the dollar has shifted to the upside," he wrote Tuesday in an email to CNBC.

Should this bounce continue, domestic markets with large multinational companies such as the S&P 500 would likely take a hit, as the negative impact of a stronger dollar on foreign earnings begins to be felt.

Commodity markets such as crude oil and metals, priced in U.S. dollars, could also feel pressure from a stronger greenback, as could emerging markets, Maley wrote. The inverse moves in the large emerging markets exchange-traded fund, the EEM, were "incredibly exact" the last two times the dollar reversed, he wrote. Specifically, he pointed to the period between September and December of last year, as well as the period between this January and late September.

Technical research analysts at Bank of America Merrill Lynch wrote in a report Tuesday that an analysis of the 10-year Treasury yield versus the dollar index suggests a stronger relative U.S. dollar going forward. Higher interest rates are typically correlated with a stronger relative currency.

"The US Dollar Index (DXY) got more positively linked to the US 10-year yield as the pattern shifted more reflationary in late 2015. If yields move higher the DXY should too," analysts led by Stephen Suttmeier wrote.

Looking ahead, economic data due out Wednesday such as ADP private-sector payrolls and ISM non-manufacturing data "could change things" for the dollar after recent gains, wrote Kathy Lien, managing director of foreign exchange strategy at BK Asset Management.

"The dollar's quiet strength suggests that investors are optimistic and it's hard not to be with stocks hitting fresh record highs Monday and Tuesday. It will be interesting to see if the greenback can maintain its firm tone after Wednesday U.S. economic reports," she wrote.

The dollar index was little changed Tuesday evening, at 93.57.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect