Oil, Gold, Stocks: The Strong Dollar Is Driving Everything Right Now

03/11/2015 5:30 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak outlines how the current strength of the US dollar/weakness of the euro comes from four sources and how the stronger dollar puts downward pressure on gold prices, oil prices, and share prices for US stocks.

Again today, March 11, it’s all about the US dollar.

The Dollar Index (USDX), which tracks the dollar against a weighted basket of currencies that includes the euro (57.6%), the yen (13.6%), the pound (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%), and the Swiss franc (3.6%), is closing in on the psychologically important 100 level. At the close in New York, the index was at 99.668, up another 1.06% for the day. That puts the index’s gain since the May 2014 low at 25%.

And the euro has continued its plunge toward parity with the dollar. The euro, today, closed at $1.0551, below the $1.06 level that represented a 12-year low for the currency and the euro is now down 14% against the dollar in 2015.

(The yen has held up remarkably well near 121 to the dollar. Support for the Japanese currency comes from its traditional role as a safe haven when market risk is climbing.)

The strength of the dollar/weakness of the euro comes from four sources.

  • The current belief that the Federal Reserve will begin to raise interest rates in June instead of September because of stronger than expected job growth in February. Higher interest rates sooner add strength to the dollar.
  • The beginning on Monday of the European Central Bank’s plan to buy 60 billion euros in assets—mostly government bonds—a month to drive down the euro and to drive up growth and inflation. The market consensus is that with supply relatively scant for many national debt securities, buying by the European Central Bank will drive interest rates—already negative for strong assets such as German government debt—out to seven year maturities, even lower. All this adds up to a weaker euro.
  • Chaos in negotiations between Greece and EuroZone creditors over the concrete austerity promises that Greece will make to win release of a 7.2 billion euro bailout extension. Tensions rose to a new height today with what seemed to be a threat by Greece to seize German assets (to enforce a 2000 ruling by the Greek Supreme Court in favor of the village of Distomo over a Nazi massacre in 1944). The troika of the International Monetary Fund, the European Central Bank, and the European Commission—which has to approve the terms of Greece’s austerity program—was supposed to begin meeting in Athens today. It didn’t. Now the date is tomorrow.
  • A growing sense that parity with the dollar—once a worst-case scenario on institutional trading desks—is merely a stopping point on a way to even lower levels. On March 19, Deutsche Bank, which told clients to sell the euro in January because it was headed to $1.10, lowered that projection to parity at $1 to one euro by the end of 2015 and a continued retreat to a low for this cycle to 85 cents to the euro. Once that thinking is out there, it makes it hard for the market to stage a sustained rally, since any gain is likely to produce selling.

Right now, a stronger dollar puts downward pressure on gold prices, on oil prices, and on share prices for US stocks. (That last is based on a fear that a stronger dollar will cut into revenue and earnings of US companies doing business overseas.)

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