US Dollar and Dow on the Verge of Opposing Breaks

The markets are once again toeing the line. Market sentiment is threatening to revive momentum in the steady advance in optimism that began back in March; and the various asset classes are showing the effects. For the maligned US dollar, the revival of confidence over the past week has pulled the currency down (on a trade weighted basis) to tag lows not seen in 14 months before bouncing and setting a ominous double bottom with the September 23rd low.

Setting up its own mark-or-break scenario, the Dow Jones Industrial Average has quickly climbed back up to eye the September range of highs around 9,850. Looking ahead, we could very well stall at these highs and build pressure for a breakout in the process (a likely scenario considering the weekend is fast approaching and we are running thin on critical fundamental drivers); but a genuine break will have to develop eventually. The question we should be asking is not when the markets will break; but will we have the momentum to sustain a trend after the decision on direction has been made.

It is easy to simply link the greenback’s future to risk appetite and play the correlation between equities and the majors. However, there are other concerns that will eventually supplant this pure balance between fear and greed. The dollar’s status as the world’s reserve is an issue that is stealing the headlines at a more frequent pace. This morning, the Financial Times reported that Asian central banks (Korea, Thailand, Malaysia, Taiwan and Singapore) were coordinating heavily on the dollar’s behalf. Not only is the low level of world’s most liquid currency stunting exports; but the pace of its descent has brought uncertainty and financial problems of its own. The blatant dependency on Fed policy and the government’s ability to manage its debts is clearly driving global leaders to start planning for a timely diversification. On the other hand, the dollar could take the helm on its own fate. Depending on officials’ ability to handle a recovery, deficits and the currency; they could still manage to maintain the status of reserve (though there seems little chance that the greenback will ever regain the prominence it has maintained over the past generation). Data released this morning suggests the recovery is on track and perhaps ahead many of its counterparts. Initial jobless claims through the end of last week dropped to a ten-month low of 521,000, suggesting the crippling trend in unemployment is improving. Ultimately, growth rides on consumer spending; and on this front, the biggest month-over-month jump in ICSC chain store sales in 13 months through September sets the trend. Along with a near record low in the average 30-year FRM mortgage, the pieces for a recovery are falling into place.