For those invested in the stocks or commodities markets, recent developments in the U.S. dollar should be monitored even more closely as we head into the final month of the year. The latest tumble in the currency will likely drive the next trends that are seen in gold, oil and the S&P 500 as market investors continue to look for alternative stores of value.
Perhaps the best way of monitoring these trends is through the PowerShares DB US Dollar Index Bullish (UUP, Financial), which tracks the value of the currency in the best forex social network against the value of most of its commonly traded counterparts. For most of this month, the exchange-traded fund (ETF) has been under pressure and these trends have made their initial impact on the gold and oil markets, which can be tracked through the United States Oil Fund (USO, Financial) and the SPDR Gold Trust ETF (GLD, Financial).
The main reason for these trends is gold and oil assets are typically priced in dollars, which gives each of these assets a strong inverse correlation in their performances. In other words, negative price movements in the dollar tend to create positive tailwinds for ETFs like Gold Trust and Oil Fund. Trends against the S&P 500, however, are more difficult to predict as there are additional factors at work when assessing the likely impact of currency weakness on corporate earnings.
In this chart, we can see currency moves in the dollar index have placed the greenback at critical support levels that do not appear to be doing much to propel its value higher. This is a major warning signal as it suggests there are not many active buyers in the market at current levels. If these trends continue, we can reasonably expect further gains in the oil and gold ETFs given their strong inversely correlated relationships. Long term, there is little reason to believe these trends will be changing, given the fact the new chairman of the Federal Reserve (Jerome Powell) has a clear record of dovish policy votes.
If we do see revisions to the current interest rate schedule that is expected by most of the financial markets, we could see the UUP fall through support levels in an even more forceful fashion, which would propel assets tied to the commodities space in ways that could be much more dramatic. So it should not matter which asset class you are currently watching in your investments in determining the importance of the recent moves seen in the UUP ETF.
Disclosure: The author has no positions in any assets mentioned.
