Dollar Rally Could Hurt Stocks & Commodities

If the U.S. Dollar Index continues to rally in 2011, the bear market in stocks may take another sharp leg lower. A strong dollar may also trigger a sell off in commodities as it did in 2008. The impact on gold, silver, and agricultural commodities is outlined in detail. More details can be found on Short Takes, the Ciovacco Capital Management investment blog:

http://www.ciovaccocapital.com/wordpress/

Saying an asset class may be "hammered" may seem like a colorful way to express an opinion, but the table below shows stock and commodities were indeed hammered during a sharp U.S. dollar rally that occurred in the period August 2008 - November 2008. In the early stages of the last bear market, inflation-friendly assets, such as commodities (DBC) and emerging market stocks (EEM) held up relatively well as investors believed (a) the economy would avoid a recession, and/or (b) central bankers could create positive inflation via their printing presses. As the scope of the problems in the global financial system came to light, the markets shifted to a strong deflationary bias in the summer of 2008 as the U.S. dollar index spiked higher. The table below shows asset class/sector performance after the dollar flashed a deflationary signal in 2008.



The video provides commentary on an ETF table, as well as ways to monitor the odds of continued strength in the dollar and weakness in stocks and commodities. The video explains inflationary and deflationary signals to look for in the Australian dollar (FXA) and agricultural commodities (DBA) .

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