The U.S. dollar, which rallied to a two-month high on Thursday, is demonstrating a bullish signal from a technical perspective and has the potential to trend up in the coming months, according to Sevens Report Research.
The greenback’s strength will weigh on equities, starting by the beginning of June, noted Tom Essaye, founder of Sevens.
The ICE U.S. Dollar Index
which measures the currency’s strength against a basket of six major rivals, is up about 1.3% over the past month to above 103 on Friday, according to Dow Jones Market Data. It is still down almost 10% from its 53-week high reached in September.
“The move higher in the US currency this week is a consequence of both safe-haven flows into the low-risk currencies and receding bets that the Federal Reserve could cut interest rates aggressively during the remainder of the year,” Matthew Ryan, head of market strategy at Ebury, wrote in a Friday note.
Read: The latest threat to stocks? A resurgent U.S. dollar.
From a technical perspective, there are signs that a potential bottom for the dollar has been formed, Essaye noted.
The Dollar Index has been holding above 101, a key support level, according to Essaye. Meanwhile, a downtrend of the dollar starting in October failed to hold since last week, Essaye noted.
“If we are on the brink of a new leg higher in the Dollar Index, expect that to become a renewed source of pressure on the broader U.S. equity market,” Essaye wrote.
A stronger dollar is negative for U.S. stocks, as it often weighs on overseas sales for U.S. companies. Roughly 40% of S&P 500 companies’ revenue are generated outside of the U.S., Essaye noted.
The dollar rallied during several, past bear markets for stocks, including the dot.com bubble burst in 2000, the 2007-2008 great financial crisis and the COVID pandemic that began in 2020.
Last year, the U.S. dollar climbed while stocks traded lower. The Dollar Index peaked in late September, two weeks before stocks reached their lowest levels of the year. The S&P 500 hit a cyclical low at 3,577.03 on Oct. 12, 2022, according to Dow Jones Market Data.
If the dollar and stocks follow a similar pattern this year, equities may begin to feel the effects of a stronger dollar by the start of June, Sevens noted.
The Dow Jones Industrial Average
ended Friday down 0.3%, up 0.4% for the past week, according to FactSet. The S&P 500 was down 0.1% Friday, up 1.7% for the past week. The Nasdaq Composite
lost 0.2% Friday and gained 3% for the week.