[NEW YORK] US stock market investors will be watching currency markets next week for signs that the recent, related trends of a weakening US dollar and a strengthening stock market will continue.
After a historically bad start to the year, the Dow and S&P 500 both moved into positive territory this week, in part on expectations that a three week move down by the US dollar could buoy corporate profits and share prices.
Many investors had been concerned over the US dollar's strength, as it can crimp exports, earnings and economic growth. Between Sept 17 and mid-February, the US dollar had risen more than 2 per cent against a basket of major currencies, as the US Federal Reserve embarked on a tighter policy while other central banks were easing.
But the S&P 500 has rallied about 9 per cent off its Feb 11 low to pull the index into positive territory for the first time this year, fueled in part by a drop in the US dollar , which has fallen more than 3 per cent over the last three weeks.
The US dollar's losses accelerated this week in the wake of the Fed's policy statement on Wednesday, which cut projections for the number of interest rate hikes this year in half. The US dollar suffered its biggest two-day drop in six weeks following the announcement.
That drop helped propel sharp gains in oil prices, back above the US$40 mark for the first time this year, in turn lifting energy shares.
"After we get through this two-day hiccup, the knee-jerk to the policy move, I would expect the dollar to resume its rally," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut, who highlighted the difference in US interest rates versus the ECB and Bank of Japan.
"Our policy rate is going one way, theirs is going the other way, that spread is going to continue to widen, no matter what."
But Thomas Lee, managing partner at Fundstrat Global Advisors in New York, expects the US dollar to continue to weaken as he believes it is more tied to inflation than central bank policies. With US dollar strength and oil weakness a headwind for equities in 2015, Mr Lee feels the reversal of those moves should be a benefit for stocks.
"We can build upon the gains from here," said Mr Lee.
"If inflation is getting stronger, the US dollar should weaken even more and that is an even bigger support for stocks."
With a short trading week ahead of the Easter holiday, volume is expected to be light as markets move closer to the Good Friday holiday, when the final reading on fourth-quarter gross domestic product is released.
Other economic data scheduled for release include February durable goods and several manufacturing surveys. Investors will be looking for signs of improvement after regional manufacturing surveys for New York and Philadelphia this week came in above expectations.
While regional Fed surveys on their own can be considered minor, when taken as a whole they give investors a good idea of "whether we are off that bottom in terms of manufacturing," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.
"We want to see if it continues across the country."