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Dollar Strength

March 18, 2013 – 10:49 pm

126868821_t670x470There is a little reported rally happening in the dollar. For months and even years going back to a peak in 2008 the dollar has been in decline but since February 1st it is up almost 5%. What does this portend for our economy and the stock market?

First, there has been a strong relationship for some time between the stock market and the dollar. As the dollar weakened the stock market gained since the recession ended in 2009. That relationship has been turned upside down as the stock market continues to march up as the dollar rises.

A stronger dollar may not cause problems for the stock market as it signals a stronger economy, however there will be industries that will suffer. U.S. exports are becoming more expensive and those companies that do a lot of business overseas and those that are international in nature will see their profits become constrained.

The more important issue is whether this trend will continue. Not long ago there was talk of a race to the bottom as countries around the world scrambled to weaken their currencies, the U.S. among them. This was a misguided attempt to spur growth through exports. Today the dollar strength has little to do with that attempt and is more aligned to the fact that the U.S. is one of the stronger economies in relative terms.

For investors a stronger dollar is neither good nor bad just another piece of the puzzle in searching for profits.

Good Trading
Steve Peasley

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