For the last few years, every time the Dollar fell, the markets would move higher. Today, the U.S Dollar fell sharply and after a major gap higher, as the Dollar fell, the markets collapsed lower as well. Once the Dollar bounced, the markets bounces. What is going on? Can we make sense of this? The SPDR S&P 500 ETF (NYSE:SPY) is trading at $133.59, +0.58 (+0.44%).
It appears the Dollar may be at a pivot point where a drop is now negative to the markets. Let’s figure this out. With the PPI numbers this morning, it is clear inflation is hitting the producers of goods in this country at all levels. This is the step prior to it hitting the consumers at all levels. As of now, it is just cracking the average American in regards to food and energy. However, it is clearly going to be eating away at profits for companies. Margins should be much lower.
As inflation starts to soar, the likelihood of further quantitative easing is vanishing. There have even been calls by some Federal Reserve officials to halt QE-2. While this is unlikely to happen, it is pretty clear with inflation already pumping in the system, QE-3 will not come to pass.
The more inflation in the system, the less stimulus can be pushed through. Think of the Federal Reserve’s stimulus and printing of money as a drug to the market, the addict. As the Dollar drops, prices rise, pushing inflationary pressures higher. This is now a major negative. The stronger the Dollar, the more likely stimulus can be needled into the markets veins.
Using this thinking, it is very likely that a stronger Dollar is now what Wall Street demands to keep the drugs flowing. A weaker Dollar will only raise inflationary pressures, cutting into profits and not allowing the Federal Reserve to print endless money.