Is the Weak Dollar Era Over?

07/12/2011 2:14 pm EST

Focus: MARKETS

David Callaway

CEO, The Street, Inc.

After years of weakness, the dollar could end its long-term downward trend soon, which would have big implications for stocks and  commodities, observes David Callaway of MarketWatch in this exclusive interview with MoneyShow.com.

David, I wanted to talk to you about the market, and what’s happening as far as asset allocation shifts.

Investors need to focus, really, and avoid the day-to-day headlines—"Cisco is down 5%. What do I do? What do I do?"

Focus on trend shifts. Trend shifts happen a little slower. We’re near the end of a multi-year trend shift toward a weak dollar. I believe that’s going to change probably this year.

We’re in a multi-year run, at the end of a multi-year run of commodities. I think that’s going to change when the dollar changes.

Stock market trend shifts happen every two, three, or four years. We’re in the third year of a US bull market. I think that could continue a little longer. When it stops, there will be a two-year bear market. So, investors need to spot these trend shifts—not the day-to-day noise—to position their portfolios best.

So, if investors want to spot when that bull market is going to end, what should they be looking for? Should they be looking at the dollar again?

Well, you don’t need to time it to the day, but you do want to look at the trend.

I think that the trend that we’ve seen over the last decade has all been attributed to the weak dollar. That’s why oil, gold, and silver have been surging. Agricultural commodities follow them up.

Certain stocks have been in a bull market or a bear market, but it’s all been tied to the weak dollar. If that changes, and it could as US interest rates start to rise—another trend we haven’t seen in many years—then everything flips on itself.

Should investors be looking at the markets broadly, do you think? Or should they be looking at how these shifts could affect certain sectors?

Well, it depends on the type of investor you are. If you’re looking at it broadly, and you can buy certain mutual funds and ETFs, you can take advantage of these trend shifts.

A lot of investors want to be more sophisticated. They want to play what I call “trend opportunities within shifts.” Nuclear power is out of favor because of the Japanese earthquake, so buy uranium, right?

But, if you just watch the shifts, you can generally at least figure out the asset class you want to be in most. Then you can break it down to your satisfaction.

For the rest of the presidential cycle, which is what we’re looking at right now, the asset classes you like are...?

Well, I think US stocks. They tend to do well during the presidential election year, especially when an incumbent is running. We're in the third year of a bull market. It’s going to hit the fourth year right up through the presidential cycle.

So, I think you’ve got to like stocks. You’ve got to think maybe that the dollar has bottomed out, or is starting to bottom out, and commodities look a little top heavy.

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