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Stocks May Be Impacted By A Rising Dollar By The End Of June, One Analyst Says

May 20, 2023
minute read

According to Research, the U.S. dollar, which recently reached a two-month high, is displaying a bullish signal from a technical standpoint, suggesting the potential for an upward trend in the coming months. Tom Essaye, the founder of Sevens, pointed out that the strength of the greenback will likely exert downward pressure on equities, starting from the beginning of June.


Based on data from Dow Jones Market Data, the ICE U.S. Dollar Index (DXY), which gauges the strength of the currency against a basket of six major counterparts, has risen approximately 1.3% over the past month, surpassing 103 on Friday. However, it remains nearly 10% lower than its 53-week high achieved in September.

Matthew Ryan, the head of market strategy at Ebury, highlighted that the recent upswing in the U.S. currency can be attributed to both safe-haven flows into low-risk currencies and diminishing expectations of aggressive interest rate cuts by the Federal Reserve for the rest of the year.

From a technical perspective, Essaye observed signs indicating that a potential bottom has formed for the dollar. He pointed out that the Dollar Index has held above the crucial support level of 101. Furthermore, the downtrend of the dollar that began in October has failed to sustain itself since last week.

Essaye warned that if a new leg higher in the Dollar Index is imminent, it could exert renewed pressure on the broader U.S. equity market.

A stronger dollar typically has negative implications for U.S. stocks, as it often hampers overseas sales for American companies. Essaye highlighted that approximately 40% of revenue generated by S&P 500 companies originates outside the U.S.

Historically, the dollar has rallied during previous bear markets, including the dot-com bubble burst in 2000, the 2007-2008 financial crisis, and the onset of the COVID pandemic in 2020. Last year, while stocks were declining, the U.S. dollar experienced an ascent. The Dollar Index peaked in late September, two weeks prior to stocks reaching their lowest levels of the year. On October 12, 2022, the S&P 500 hit a cyclical low at 3,577.03, as per Dow Jones Market Data.

Sevens Report Research noted that if the dollar and stocks follow a similar pattern this year, equities may begin to feel the impact of a stronger dollar starting in June.

 

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Cathy Hills
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