Recession to Inflation: Transitions Benefit the Dollar

by: Brett Steenbarger posted on: June 13, 2008 | about stocks: DIA / QQQQ / SPY / UDN / UUP    



With the steady rise in U.S. interest rates since March (10-year Treasury rate; top chart), the U.S. dollar has found recent buying interest (U.S. dollar index; bottom chart).

Interestingly, while lower rates (higher Treasury prices) were associated with falling stocks during the first quarter of 2008 (flight to quality amidst credit fears), we're recently seeing stock market weakness in the face of rising rates and inflationary concerns. It's a nice example of transitions among market themes. This transition--from recessionary collapse to inflation, especially in recent Fed statements--is something that will affect how equities respond to economic statistics and intermarket relationships going forward.

Meanwhile, U.S. rates have a way to go before they're competitive with many rates around the world. Here are two-year government debt rates across a few countries:

Japan: 1.02%
U.S.: 3.05%
Germany: 4.65%
U.K.: 5.54%
Australia: 7.15%
Brazil: 14.82%

With such interest rate differentials and a reluctance to cut rates overseas in the face of rising commodity prices and consumer inflation, continued U.S. dollar strength will likely depend upon continued upward pressure in Treasury yields, which hardly favors interest-rate sensitive sectors of the U.S., including housing.

This article has 4 comments! Add yours below...
Brett Steenbarger

Brett Steenbarger

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This article has 4 comments:

  •  
    Zooey
    Jun 13 03:02 PM
    Hardly worth the time. We know that US rates are relatively low,but we do not know what that means, if anything, to equities which are facing a sustained decline based on the consumer's behavior - not consuming. Attempts to revalue the dollar is interesting, but likely not workable in the US market since housing has the center of the economic stage. By the way the interest in revaluing the dollar is all based on energy which is killing consumption. Not like G8 cares very much since they know a stiff when they see one.
  •  
    Ernest Wong
    Jun 13 06:04 PM
    My Website
    Finally the USDX broke out of a bullish pattern, with EUR, CHF and GBP are all at their support levels. Chart patterns suggest a break down very soon. Stay tuned.
  •  
    Pangaea
    Jun 13 11:44 PM
    On the housing point, in that market's current condition it's rather unsettling to see mortgage rates zooming higher over the past month...

    bankrate.com/brm/graph...
  •  
    Will Rahal
    Jun 14 12:02 PM
    My Website
    I think the dollar should be bought.
    Despite the jump in retail sales, the economic indicator point to a recession.
    I expect inflation as measured by the CPI to start heading lower.
    The difference in the 6-month vs 18-month annualized rate always dips into negative territory as the economy softens.
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