Dollar Rebound Could Cause Pullback Commodities, Foreign Stocks, Bonds

Commodities, natural resources stocks, and foreign real estate stocks all enjoyed strong gains in May. Like stocks, commodities are benefiting from economic optimism. Commodities are also benefiting from the “reflation trade,” where rising inflation expectations stimulates the purchases of “anti-dollar” asset classes such as commodities, gold, resource/materials stocks, and foreign stocks.

The U.S. dollar index dropped 4.9% in May, and, along with Treasury Bonds, has been one of the weakest asset classes in 2009. The U.S. dollar index is approaching key support levels in the 76-78 range (versus a current value of 79.2). Accordingly, we would be surprised if the US dollar had much additional downside risk relative to most other major currencies with respect to either the short- or the intermediate-term.

The U.S. Dollar Index did spend nearly six months below the 76 level between March and September of 2008, but that period coincided with an extreme “blow-off” move in the price of oil, which exerted extraordinary downward pressure on the U.S. dollar. A rebound in the U.S. dollar would likely coincide with a pullback in commodity-oriented investments, foreign stocks and bonds, and risk assets generally.

Following the recent rebound in REIT prices, and also owing to dividend cuts and dilution from new stock sales, the yield on the NAREIT All-REIT index has dropped to 7.4%, only one percent above the long-term average. This level of yield is uninspiring, given the negative fundamentals of the asset class. Other areas of the equity markets are more attractively valued, which argues for an underweight allocation to U.S. REITs.

Comments

[prairiedog555:]

Note, I love a good conspiracy theory, so does it seem that the dollar is going up after Turbo Tim went to the woodshed in China?
Were promises made?
Also, would you say that 90% of the comments on this and other Blogs all say it is a fait accompli that the dollar will crash? How often is 90% of the market right? It will go down eventually, for all of the reasons cited, but in the short term of a few years the mega rich market movers will manipulate the market and use we mice for fun and profit.

Jun 11 08:10 AM

[Donald Ingram:]

The US dollar will continue to slowly lose support on the worlds financial stage. At least that's the Feds hope. Avoid a crash at all costs. And I mean at ALL costs!

Jun 11 11:05 AM

[johnbee:]

Bernanke's job is to let the $ drop slowly to repay debts and revalue houses in bookeeping terms; and at the same time to keep interest rates down to stimulate the economy. The more $'s he prints the more this is likely to happen, but he needs make sure the banks lend to commerce and for housing. So he should, in my view, keep many banks inside the TARP controls or those out of it will become greedy again and destroy recovery with higher rates.

Jun 12 06:57 AM