Is a Weaker Dollar Fueling the Bull Market or Reflecting It?

1) US DOLLAR – The US Dollar Index (DXY) is on track to close the week at its lowest level since 2022.  If you listen to the popular narrative, that weakness is the reason stocks have been able to move higher.  The story goes like this: A falling dollar fuels global liquidity, boosts multinational earnings, and lights the match for a bull market.  But what if that logic has it backwards?  What if the weaker dollar is not the cause of this bull market, but the result of it?  For decades, the U.S. dollar has functioned as a safe haven.  When investors get nervous, capital flows into dollars.  When fear rises, demand for safety rises with it.  The dollar benefits.  So what does it mean when the dollar is making multiyear lows in the middle of a broadening bull market?  What if it’s not about debasement, or the end of fiat?  In an environment where investors are embracing risk across sectors, countries, and asset classes, who needs the ultimate safe haven?  While using the Dollar Index (DXY) to track the US Dollar makes sense, we need to understand what is in that tracker.  To many people’s surprise, the DXY is a basket of developed-market currencies.  The euro makes up more than 57% of it, with the rest split among the British pound, Japanese yen, Swiss franc, Canadian dollar, and Swedish krona.  In other words, when the DXY falls, it's mostly telling us how the dollar is behaving relative to those other developed economies.  What happens when we strip out those developed-market currencies entirely and focus only on emerging markets?  Take a look at the WisdomTree Emerging Currency Strategy Fund (CEW), an equally weighted basket of 15 emerging-market currencies.  Look what’s in there…Thai baht, Polish zloty, Mexican peso, and Korean won.  These are not the types of currencies investors pile into when they are scared and hiding in cash.  These currencies are pro-cyclical…growth sensitive.  They thrive when capital is flowing toward opportunity, not away from it.  So, my takeaway is that the declining Dollar Index is simply another data point showing that investors around the world are embracing risk.

2) GOLD – So far, gold is still doing what we thought… bumping up against the $5,100 area as Gold Volatility is finding some footing after a big drop.  Gold Volatility (GVZ) is still a tad over 29, and probabilities are increasing that volatility moves toward 32 again, which gold would NOT like.  So, again, this is a spot where gold traders might be taking some profit.  Gold investors just need to be patient until gold volatility can stay below 32.  This isn’t suggesting gold collapses from here, just that it still has consolidation work to do.  There is also an Implied Volatility DISCOUNT in the Gold proxy (GLD).  That suggests complacency by the crowd, which just continues to give evidence that the consolidation should continue.

3) MOVE – MOVE Index (bond volatility) is still signaling bearish trend (downward bias), after failing at the lower end of its trend range.  The important part here is that Bond volatility under control is a very good thing for all assets.  The 2YR Yield is back to neutral after yesterday’s big up move with the jobs data that came out.  Will that data get revised downward like it has been so many times?  Who knows… it’s just ridiculous that the US can’t get a more accurate reading of jobs growth.  Anyway, the 2 YR is waiting on the inflation data set to come out tomorrow morning.  The bean counting of the internal items that make up the inflation report suggest a slowing report with CPI set to slow -18 basis points vs. last month’s 2.68% Year over Year (YoY).  If that happens, we’ll likely see the 2YR drop into bearish trend territory again.  Longer dated yields also remain neutral trend.