Stronger Dollar Fails to Break Equity Markets

James Hyerczyk from ForexHound.com at 10/11/09

Buyers continued to push U.S. equity markets higher as the stronger Dollar failed to break stock trader optimism.  Early in the trading session, equity traders were nervous about buying stocks because of comments from Fed Chairman Bernanke regarding a possible interest rate hike and a shift toward a tight monetary policy.  Once traders realized that these events have some time to develop, they once again began to focus on the short-term and third quarter earnings, driving equity markets higher.

U.S. Treasury market traders acted more pessimistically toward Bernanke’s comments by driving down December Treasury Bonds.  Some of this selling was related to the weak 30-year auction results from the previous day. 

The U.S. Dollar managed to mount a strong recovery, boosted by the hawkish comments from Bernanke.  The Dollar still finished lower, but well off its lows.  Throughout the week, the pressure was on the Dollar, but with the strong recovery on Friday, traders are now looking for spillover buying to drive prices higher early next week.  The surprise of the day was the strength in the Canadian Dollar.  The December Canadian Dollar soared to the upside following a better than expected Canadian Unemployment Report.

The stronger Dollar helped lead to selling pressure in December Gold.  The rapid rise in this precious metal is leading some traders to believe that a “bubble” may be forming.  If the market went up in anticipation of weaker U.S. interest rates and a weaker Dollar then talk of higher interest rates could trigger a sharp sell-off.  Traders should be careful about buying strength.

Friendly comments from the International Energy Agency regarding a pick-up in global oil demand helped support December Crude Oil today.  This is important because a stronger Dollar usually puts pressure on crude oil prices.  Mixed fundamentals should continue to hold this market in a tight range.