What’s going on in the world these days?
After months and months of falling values the US Dollar has finally caught a bid! In the last three weeks we’ve seen the US Dollar climb in value. The Dollar bottomed out at the ridiculously low level of $73 and then went on a run.
Now some of you could care less I’m sure. Maybe you don’t trade currencies, or have plans to travel overseas… so you probably don’t think the value of the dollar is important.
I’m here to tell you to think again!
The strength or weakness of the US Dollar is incredibly important to you and your trading accounts… and I’ll show you why in a moment.
But let’s take a deeper look. The US Dollar is getting stronger against a big basket of foreign currencies.
You can see it in the chart… but the million dollar question is why?
Chart courtesy of stockcharts.com
The reason for the US Dollar strength is simple… the end of QE2. No I’m not talking about the great ocean liner… I’m talking about the Federal Reserve’s quantitative easing program.
The Fed has announced that their second round of quantitative easing is coming to an end.
This is a huge development. It means the easy money policy is starting to change. Now, a word of warning… this doesn’t mean we’ll see big changes right away. If ever there was a cautious group of individuals in Washington, the Fed is it.
Their change in stance isn’t so much a tightening of monetary policy as it is a warning monetary policy won’t loosen further.
While it doesn’t sound like a big change, its impact is significant.
The easy money policy did two things… it weakened the US Dollar and it made money cheap and easy.
So US exports overseas became cheaper for customers to buy… helping US industry post record profit numbers. And with the easy money policy, companies (especially banks) could borrow at ridiculous levels.
With the Fed pumping money into the economy, the US Stock market always does well. And that’s why we’ve seen such a great run in the markets for the last few years.
However… now the party is over, and the stock market will struggle!
You don’t need an advanced degree in economics to understand when money is hard to find, the cost of borrowing goes up significantly. The higher the cost, the more expensive it is for consumers and businesses.
Bigger expenses lower corporate profits… and with lower profits, the less valuable a company is. With corporate values falling, the stock price has only one direction to move… lower!
This is a long term story that will play out over the next few quarters… but consider yourself warned. There’s a significant possibility of a correction in the markets… or at least a period of limited to no growth.
Remember, sidestepping a bad market is sometimes more important than catching a climbing market.