A Good Time to Invest as U.S. Equities and Dollar On the Move
by Hiland Doolittle
Ever since March 2009, the relationship between the dollar and U.S. equities has behaved like similar ends of a magnet. When equities rose, the dollar fell and vice versa. Analysts blamed the role of the government’s lenient credit policy for this inconsistency.
Now, other factors have come into play. The dollar and equities seem to be reacting similarly to national and global economic events. On the national scene, there are signs that employment is stable, trending upwards and definitely has the attention of the Obama Administration.
While the necessary spirit of cooperation is at record lows in Washington, there appears a hint of progress. The $15 billion jobs bill is progress and consumer spending is on the rise. Meanwhile, more small businesses have indicated a willingness to hire.
The Federal Reserve had such favorable credit terms that the effect was to drive the dollar down and equities up. Basically, investors were using a currency that cost virtually nothing to acquire undervalued equities. It may have been and still may be a false economy, but it stemmed the tide at a critical time.
With recent statements from Fed Chairman, Ben Bernanke, the future of the dollar looks good. Bernanke has outlined a series of actions designed to strengthen the currency. Interest rate hikes, a cessation of purchasing distresses assets and certain progressive credit reforms are all positive steps for the dollar.
Timing is Everything
The Fed’s changes have been timely. As the euro zone tries to untangle the financial chaos in Greece, the euro has suffered a significant downturn. In 2010, the euro has dropped 4.8 percent against the dollar and a whopping 7.6 percent against the yen.
On Monday, French President Nicolas Sarkozy said there are plans to rescue Greece. He added that if the fiscal crisis in Greece worsened the euro would be hurt. Currency trading has been light as investors are waiting and watching Prime Minister Papandreou’s attempts to control the damage.
But, Greece may well be just the first block in the tenable euro zone to tumble. Spain may be next with Italy, Portugal and Ireland in the wings. With talk of more quantitative easing in Great Britain and a fair amount of intense disagreement between the liberal and conservative factions in England, the pound is wavering under the pressure.
Australian and New Zealand dollars rose favorably against the dollar on Monday.
In 2010, the S&P 500 is up 2 percent. The dollar has risen 3 percent. Helping the equities markets are a new infusion of merger and acquisition activity. The Options Exchange Volatility Index (VIX) is a highly regarded index indicating markets attitudes. The VIX has fallen below 18 percent and is trending towards the year’s low.
As the Oracle of Omaha suggested, things are looking up and it is a good time to invest, in the dollar and in equities.
Tags: Bernanke, British Pound, Economy, Euro, Euro Zone, interest rates, US Dollar, US Unemployment
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
