Market Snapshot: Why the 2023 stock market rally may depend on further U.S. dollar weakness

by | Feb 5, 2023 | Stock Market

The U.S. dollar may be losing its appeal as one of the few reliable safe-haven assets in times of economic and geopolitical uncertainty after an 18 month rally, but a further fall by the currency could fuel a 2023 stock-market rally, market analysts said. The ICE U.S. Dollar Index
fell to a nine-month low on Wednesday after the Federal Reserve, as expected, raised the fed-funds rate by 25 basis points, lifting its policy interest rate for the eighth straight meeting and signaling more than one further rise is still planned. But markets remained at odds with the Fed’s forecast for rates to peak above 5% and stay there, instead pricing in rate cuts before year-end.

While Powell continued to push back against rate-cut expectations and repeated his previous concern about easy financial-market conditions, he also acknowledged for the first time that “the disinflationary process has started.” That was enough for traders to bet the rate-hike cycle is nearing its end, with cuts soon in store. The dollar index, a gauge of the greenback’s strength against a basket of six major currencies, fell 0.9% to 101.04 on Wednesday afternoon, its lowest level since April 25, Dow Jones Market Data show.  The dollar surged for most of 2022, with the index jumping 19% in the first nine months of the year and hitting a peak of 114.78 in late-September, as higher interest rates in the U.S. drew in foreign investors. A surging dollar, described as a “wrecking ball,” was blamed in part for a plunge in stocks. The greenback’s gains came as climbing Treasury yields made bonds more attractive relative to other income earning assets.  The dollar’s subsequent over …

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