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Weak Dollar/Strong Equity Trade Is Back

The weak dollar / strong equity trade is back with a vengeance today. Hawkish comments from Trichet in Europe has strengthened the euroand weakened the dollar.

The dollar index is at a 2-month low with strength right across the board in big name commodity stocks like Alcoa , Freeport McMoRan , and BHP Billiton .

Recall that low interest rates made the short dollar/long commodity trade one of the most consistent and profitable trades last year, but the relationship began to break down in the past few weeks.

But the euro has rallied recently due largely to the Chinese and the Japanese expressing support for Spanish and Portugese bonds*, along with further increases in the stock market in Europe. Hence, investors have gone back to that familiar trading pattern of short dollar/long commodities.

There is a Fed meeting on Wednesday, but there is next to zero probability that Bernanke will shift position away from his accomodative policies. The language should not change much; they will have a guardedly optimistic review of the economy and will likely repeat that they will continue QE2 until completed.

*See Europe Credit-Default Swaps (CDSs) here.

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