We're Loose Heading Into 2024: Where the Dollar Could Go
Financial conditions have eased significantly in recent months. Pundits toss around that term haphazardly, but there are actually a handful of specific indicators that determine how loose or tight financial conditions in the domestic economy are. Of course, the Fed Funds rate is crucial to interbank lending and the corporate fixed income space along with where the 10-year Treasury yield stands. Along with those two factors, the BBB credit spread (also known as the junk bond spread) helps shape financial conditions. The trade-weighted US dollar is the other key variable. In general, lower interest rates, tighter bond spreads, higher stock prices, and a weaker dollar contribute to loosening financial conditions. Believe it or not, there are more than 100 indicators the Chicago Fed uses to figure its National Financial Conditions Index.
Let's home in on the greenback. It is one of my go-to indicators for risk across the global financial system. Today, the US Dollar Index (DXY) has drifted under 101, printing fresh 5-month lows this morning. That has been a significant tailwind for stocks, at home and abroad. Technically, a breakdown below 100 could result in the old trading range between 90 and 103 resuming, following the 2022 spike to above 113.
What does it mean for investors? More risk-on in 2024. A protracted dollar bear market would almost certainly help equities, particularly cyclicals and multinational firms that generate significant sales from overseas. Also, the Energy and Materials sectors could benefit from a weaker greenback so long as economic growth persists, along with foreign equities. Keep your eye on gold, too. For now, I encourage investors to monitor the 100 mark – that is about the low from July.
Let's home in on the greenback. It is one of my go-to indicators for risk across the global financial system. Today, the US Dollar Index (DXY) has drifted under 101, printing fresh 5-month lows this morning. That has been a significant tailwind for stocks, at home and abroad. Technically, a breakdown below 100 could result in the old trading range between 90 and 103 resuming, following the 2022 spike to above 113.
What does it mean for investors? More risk-on in 2024. A protracted dollar bear market would almost certainly help equities, particularly cyclicals and multinational firms that generate significant sales from overseas. Also, the Energy and Materials sectors could benefit from a weaker greenback so long as economic growth persists, along with foreign equities. Keep your eye on gold, too. For now, I encourage investors to monitor the 100 mark – that is about the low from July.