ollar
The inverse relationship between bonds and commodity prices and the positiverelationship between bonds and equities have been examined. Now the importantrole the dollar plays in the intermarket picture will be considered. As mentionedin the previous chapter, it is often said that a rising dollar is considered bullish forbonds and stocks and that a falling dollar is considered bearish for both financialmarkets. However, that statement doesn't always hold up when examined against thehistorical relationship of the dollar to both markets. The statement also demonstratesthe danger of taking shortcuts in intermarket analysis.The relationship of the dollar to bonds and stocks makes more sense, and holdsup much better, when factored through the commodity markets. In other words,there is a path through the four sectors. Let's start with the stock market and workbackwards. The stock market is sensitive to interest rates and hence movements inthe bond market. The bond market is influenced by inflation expectations, which aredemonstrated by the trend of the commodity markets. The inflationary impact of thecommodity markets is largely determined by the trend of the U.S. dollar. Therefore,we begin our intermarket analysis with the dollar. The path to take is from the dollarto the commodity markets, then from the commodity markets to the bond market,and finally from the bond market to the stock market.THE DOLLAR MOVES INVERSELY TO COMMODITY PRICES
A rising dollar is noninflationary. As a result a rising dollar eventually produces lowercommodity prices. Lower commodity prices, in turn, lead to lower interest rates andhigher bond prices. Higher bond prices are bullish for stocks. A falling dollar has theexact opposite effect; it is bullish for commodities and bearish for bonds and equities.Why, then, can't we say that a rising dollar is bullish for bonds and stocks and justforget about commodities? The reason lies with long lead times in these relationshipsand with the troublesome question of inflation.It is possible to have a falling dollar along with strong bond and equity markets.Figure 5.1 shows that after topping out in the spring of 1985, the U.S. dollar droppedfor almost three years. During most of that time, the bond market (and the stockmarket) remained strong while the dollar was falling. More recently, the dollar hit anintermediate bottom at the end of 1988 and began to rally. The bond market, althoughsteady, didn't really explode until May of 1989.
COMMODITY PRICE TRENDS-THE KEY TO INFLATIONTurns in the dollar eventually have an impact on bonds (and an even more delayedimpact on stocks) but only after long lead times. The picture becomes much clearer,however, if the impact of the dollar on bonds and stocks is viewed through thecommodity markets. A falling dollar is bearish for bonds and stocks because it isinflationary. However, it takes time for the inflationary effects of a falling dollar tofilter through the system. How does the bond trader know when the inflationaryeffects of the falling dollar are taking hold? The answer is when the commoditymarkets start to move higher. Therefore, we can qualify the statement regardingthe relationship between the dollar and bonds and stocks. A falling dollar becomesbearish for bonds and stocks when commodity prices start to rise. Conversely, a risingdollar becomes bullish for bonds and stocks when commodity prices start to drop.
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The upper part of Figure 5.2 compares bonds and the U.S. dollar from 1985through the third quarter of 1989. The upper chart shows that the falling dollar,which started to drop in early 1985, eventually had a bearish effect on bonds whichstarted to drop in the spring of 1987 (two years later). The bottom part of the chartshows the CRB Index during the same period of time. The arrows on the chart showhow the peaks in the bond market correspond with troughs in the CRB Index. Itwasn't until the commodity price level started to rally sharply in April 1987 thatthe bond market started to tumble. The stock market peaked that year in August,leading to the October crash. The inflationary impact of the falling dollar eventuallypushed commodity prices higher, which began the topping process in bonds andstocks.The dollar bottomed as 1988 began. A year later, in December of 1988, the dollarformed an intermediate bottom and started to rally. Bonds were stable but lockedin a trading range. Figure 5.3 shows that the eventual upside breakout in bonds wasdelayed for another six months until May of 1989, which coincided with the bearish breakdown in the CRB Index. The strong dollar by itself wasn't enough to push the
THE DOLLAR VERSUS THE CRB INDEX
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FIGURE 5.3A COMPARISON OF THE BONDS AND THE DOLLAR (UPPER CHART) AND COMMODITYPRICES (LOWER CHART) FROM LATE 1988 TO LATE 1989. THE BULLISH IMPACT OF THEFIRMING DOLLAR ON THE BOND MARKET WASN'T FULLY FELT UNTIL MAY OF 1989 WHENCOMMODITY PRICES CRASHED THROUGH CHART SUPPORT. TOWARD THE END OF 1989,THE WEAKENING DOLLAR IS BEGINNING TO PUSH COMMODITY PRICES HIGHER, WHICHARE BEGINNING TO PULL BONDS LOWER.
FIGURE 5.2A COMPARISON OF BONDS AND THE DOLLAR (UPPER CHART) AND COMMODITY PRICES(LOWER CHART) FROM 1985 THROUGH 1989. A FALLING DOLLAR IS BEARISH FOR BONDSWHEN COMMODITY PRICES ARE RALLYING. A RISING DOLLAR IS BULLISH FOR BONDSWHEN COMMODITY PRICES ARE FALLING. THE INFLATIONARY OR NONINFLATIONARYIMPACT OF THE DOLLAR ON BONDS SHOULD BE FACTORED THROUGH THE COMMODITYMARKETS.
bond (and stock) market higher. The bullish impact of the rising dollar on bonds wasrealized only when the commodity markets began to topple.The sequence of events in May of 1989 involved all three markets. The dollarscored a bullish breakout from a major basing pattern. That bullish breakout in thedollar pushed the commodity prices through important chart support, resuming theirbearish trend. The bearish breakdown in the commodity markets corresponded withthe bullish breakout in bonds. It seems clear, then, that taking shortcuts is dangerouswork. The impact of the dollar on bonds and stocks is an indirect one and usuallytakes effect after some time has passed. The impact of the dollar on bonds and stocksbecomes more pertinent when its more direct impact on the commodity markets istaken into consideration.THE DOLLAR VERSUS THE CRB INDEX
Further discussion of the indirect impact of the dollar on bonds and equities willbe deferred until Chapter 6. In this chapter, the inverse relationship between the
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COMMODITIES AND THE U.S. DOLLAR
FIGURE 5.4THE U.S. DOLLAR VERSUS THE CRB INDEX FROM 1985 THROUGH THE FOURTH QUARTER OF1989. A FALLING DOLLAR WILL EVENTUALLY PUSH THE CRB INDEX HIGHER. CONVERSELY,A RISING DOLLAR WILL EVENTUALLY PUSH THE CRB INDEX LOWER. THE 1986 BOTTOM INTHE CRB INDEX OCCURRED A YEAR AFTER THE 1985 PEAK IN THE DOLLAR. THE 1988 PEAKIN THE CRB INDEX TOOK PLACE A HALF YEAR AFTER THE 1988 BOTTOM IN THE DOLLAR.U.S. Dollar Index versus CRB Index1985 through 1989
U.S. dollar and the commodity markets will be examined. I'll show how movementsin the dollar can be used to predict changes in trend in the CRB Index. Commodityprices axe a leading indicator of inflation. Since commodity markets represent rawmaterial prices, this is usually where the inflationary impact of the dollar will be seenfirst. The important role the gold market plays in this process as well as the actionin the foreign currency markets will also be considered. I'll show how monitoringthe price of gold and the foreign currency markets often provides excellent leadingindications of inflationary trends and how that information can be used in commodityprice forecasting. But first a brief historical rundown of the relationship between theCRB Index and the U.S. dollar will be given.The decade of the 1970s witnessed explosive commodity prices. One of thedriving forces behind that commodity price explosion was a falling U.S. dollar. Theentire decade saw the U.S. currency on the defensive.
THE DOLLAR VERSUS THE CRB INDEX
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FIGURE 5.5THE U.S. DOLLAR VERSUS THE CRB INDEX DURING 1988 AND 1989. THE DOLLAR BOTTOMAT THE START OF 1988 WAS FOLLOWED BY A CRB PEAK ABOUT SIX MONTHS LATER. THEBULLISH BREAKOUT IN THE DOLLAR DURING MAY OF 1989 COINCIDED WITH A MAJORBREAKDOWN IN THE COMMODITY MARKETS.U.S. Dollar Index versus CRB Index1988 through 1989
The fall in the dollar accelerated in 1972, which was the year the commodityexplosion started. Another sharp selloff in the U.S. unit began in 1978, which helpedlaunch the final surge in commodity markets and led to double-digit inflation by1980. In 1980 the U.S. dollar bottomed out and started to rally in a powerful ascentthat lasted until the spring of 1985. This bullish turnaround in the dollar in 1980contributed to the major top in the commodity markets that took place the same yearand helped provide the low inflation environment of the early 1980s, which launchedspectacular bull markets in bonds and stocks.The 1985 peak in the dollar led to a bottom in the CRB Index one year later inthe summer of 1986. I'll begin analysis of the dollar and the CRB Index with thedescent in the dollar that began in 1985. However, bear in mind that in the 20 yearsfrom 1970 through the end of 1989, every important turn in the CRB Index has beenpreceded by a turn in the U.S. dollar. In the past decade, the dollar has made three
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COMMODITIES AND THE U.S. DOLLAR
THE KEY ROLE OF GOLD
63
THE PROBLEM OF LEAD TIME
FIGURE 5.6THE DOLLAR VERSUS COMMODITIES DURING 1989. A RISING DOLLAR DURING MOST OF1989 EXERTED BEARISH PRESSURE ON COMMODITIES. A "DOUBLE TOP" IN THE DOLLAR INJUNE AND SEPTEMBER OF THAT YEAR, HOWEVER, IS BEGINNING TO HAVE A BULLISH IMPACTON COMMODITIES. COMMODITIES USUALLY TREND IN THE OPPOSITE DIRECTION OF THEDOLLAR BUT WITH A TIME LAG.U.S. Dollar Index versus CRB IndexDec. 1988 through Sept. 1989
Although the inverse relationship between both markets is clearly visible, there's stillthe problem of lead and lag times. It can be seen that turns in the dollar lead turnsin the CRB Index. The 1985 top in the dollar preceded the 1986 bottom in the CRBIndex by 17 months. The 1988 bottom in the dollar preceded the final peak in theCRB Index by six months. How, then, does the chartist deal with these lead times?Is there a faster or a more direct way to measure the impact of the dollar on thecommodity markets? Fortunately, the answer to that question is yes. This brings usto an additional step in the intermarket process, which forms a bridge between thedollar and the CRB Index. This bridge is the gold market.THE KEY ROLE OF GOLD
In order to better understand the relationship between the dollar and the CRB Index,it is necessary to appreciate the important role the gold market plays. This is true for
FIGURE 5.7THE STRONG INVERSE RELATIONSHIP BETWEEN THE GOLD MARKET AND THE U.S. DOLLARCAN BE SEEN OVER THE PAST FIVE YEARS. GOLD AND THE DOLLAR USUALLY TREND INOPPOSITE DIRECTIONS.Cold versus U.S. Dollar Index1985 through 1989
significant trend changes which correspond with trend changes in the CRB Index.The 1980 bottom in the dollar corresponded with a major peak in the CRB Index thesame year. The 1985 peak in the dollar corresponded with a bottom in the CRB Indexthe following year. The bottom in the dollar in December 1987 paved the way for apeak in the CRB Index a half-year later in July of 1988.Figures 5.4 through 5.6 demonstrate the inverse relationship between thecommodity markets, represented by the CRB Index, and the U.S. Dollar Index from1985 to 1989. Figure 5.4 shows the entire five years from 1985 through the thirdquarter of 1989. Figures 5.5 and 5.6 zero in on more recent time periods. The chartsdemonstrate two important points. First, a rising dollar is bearish for the CRB Index,and a falling dollar is bullish for the CRB Index. The second important point is thatturns in the dollar occur before turns in the CRB Index.
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two reasons. First, of the 21 commodity markets in the CRB Index, gold is the mostsensitive to dollar trends. Second, the gold market leads turns in the CRB Index.A trend change in the dollar will produce a trend change in gold, in the oppositedirection, almost immediately. This trend change in the gold market will eventuallybegin to spill over into the general commodity price level. Close monitoring of thegold market becomes a crucial step in the process. To understand why, an examinationof the strong inverse relationship between the gold market and the U.S. dollar isnecessary.Figure 5.7 compares price action in gold and the dollar from 1985 through 1989.The chart is striking for two reasons. First, both markets clearly trend in oppositedirections. Second, turns in both markets occur at the same time. Figure 5.7 showsthree important turns in both markets (see arrows). The 1985 bottom in the goldmarket coincided exactly with the peak in the dollar the same year. The major top
THE KEY ROLE OF GOLD
65
in gold in December 1987 took place as the dollar bottomed at the same time. Theleveling off process in the gold market in June of 1989 coincided with a top in thedollar.Figure 5.8 provides a closer view of the turns in late 1987 and mid-1989 anddemonstrates the strong inverse link between the two markets. Figure 5.9 comparesturns at the end of 1988 and the summer and fall of 1989. Notice in Figure 5.9 howthe two peaks in the dollar in June and September of 1989 coincided perfectly witha possible "double bottom" developing in the gold market. Given the strong inverselink between gold and the dollar, it should be clear that analysis of one market isincomplete without analysis of the other. A gold bull, for example, should probablythink twice about buying gold while the dollar is still strong. A sell signal in thedollar usually implies a buy signal for gold. A buy signal in the dollar is usually asell signal for gold.
FIGURE 5.8THE DOLLAR VERSUS GOLD DURING 1988 AND 1989. PEAKS AND TROUGHS IN THE DOLLARUSUALLY ACCOMPANY OPPOSITE REACTIONS IN THE GOLD MARKET. THE DOLLAR RALLYTHROUGH ALL OF 1988 AND HALF OF 1989 SAW FALLING GOLD PRICES. THESE TWOMARKETS SHOULD ALWAYS BE ANALYZED TOGETHER.
FIGURE 5.9THE DECEMBER 1988 BOTTOM IN THE DOLLAR OCCURRED SIMULTANEOUSLY WITH A PEAKIN GOLD. THE JUNE AND SEPTEMBER 1989 PEAKS IN THE DOLLAR ARE CORRESPONDING
U.S. Dollar Index versus Cold1988 through 1989 .
Cold versus U.S. DollarDecember 1988 through September 1989
WITH TROUGHS IN THE GOLD MARKET.
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COMMODITIES AND THE US. DOLLAR
FOREIGN CURRENCIES AND GOLDNow another dimension will be added to this comparison. Gold trends in the oppositedirection of the dollar. So do the foreign currency markets. As the dollar rises,foreign currencies fall. As the dollar falls, foreign currencies rise. Therefore, foreigncurrencies and gold should trend in the same direction. Given that tendency thedeutsche mark will be used as a vehicle to take a longer historical look at thecomparison of the gold market and the currencies. It's easier to compare the gold'srelationship with the dollar by using a foreign currency chart, since foreign currenciestrend in the same direction as gold.Figure 5.10 shows the strong positive relationship between gold and the deutschemark in the ten years from 1980 through 1989. (Although the mark is used inthese examples, comparisons can also be made with most of the overseas currencymarkets—especially the British pound, the Swiss franc, and the Japanese yen—or
FIGURE 5.10GOLD AND THE DEUTSCHE MARK (OVERSEAS CURRENCIES) USUALLY TREND IN THE SAMEDIRECTION (OPPOSITE TO THE DOLLAR). GOLD AND THE MARK PEAKED SIMULTANEOUSLYIN 1980 AND 1987 AND TROUGHED TOGETHER IN 1985.Cold versus Deutsche Mark1980 through 1989
FOREIGN CURRENCIES AND GOLD
67
some index of overseas currencies.) Notice how closely the turns occur in bothmarkets in the same direction. Three major turns took place in both markets duringthat 10-year span. Both markets peaked out together in the first half of 1980 (leadingthe downturn in the CRB Index by half a year). They bottomed together in the firsthalf of 1985, and topped out together in December of 1987. Going into the summerof 1989, the mark (along with other overseas currencies) was dropping (meaning thedollar was rising) and gold was also dropping (Figure 5.11). The mark and gold bothhit a bottom in June of 1989 (coinciding with a pullback in the dollar).In September of 1989, the mark formed a second bottom which was much higherthan the first. The gold market hit a second bottom at the exact same time, forming a"double bottom." The pattern of "rising bottoms" in the mark entering the fall of 1989formed a "positive divergence" with the gold market and warned of a possible bottomin gold. Needless to say, the rebound in the mark and the gold market corresponded
FIGURE 5.11GOLD VERSUS THE DEUTSCHE MARK FROM 1987 THROUGH MOST OF 1989. BOTH PEAKEDTOGETHER AT THE END OF 1987 AND FELL UNTIL THE SUMMER OF 1989. THE PATTERN OF"RISING BOTTOMS" IN THE MARK DURING SEPTEMBER OF 1989 IS HINTING AT UPWARDPRESSURE IN THE OVERSEAS CURRENCIES AND THE COLD MARKET.Gold versus Deutsche Mark1987 through 1989
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COMMODITIES AND THE U.S. DOLLAR
with a setback in the dollar. Given the close relationship between the gold market andthe deutsche mark (and most major overseas currencies), it can be seen that analysisof the overseas markets plays a vital role in an analysis of the gold market and ofthe general commodity price level. Since it has already been stated that the goldmarket is a leading indicator of the CRB Index, and given gold's close relationshipto the overseas currencies, it follows that the overseas currencies are also leadingindicators of the commodity markets priced in U.S. dollars. Figure 5.12 shows whythis is so.
GOLD AS A LEADING INDICATOR OF THE CRB INDEX
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FIGURE 5.13DURING THE SPRING OF 1989, GOLD LED THE CRB INDEX LOWER AND ANTICIPATED THECRB BREAKDOWN THAT OCCURRED DURING MAY BY TWO MONTHS. FROM JUNE THROUGHSEPTEMBER OF 1989, A POTENTIAL "DOUBLE BOTTOM" IN GOLD IS HINTING AT A BOTTOMIN THE CRB INDEX.CRB Index versus Cold1989
GOLD AS A LEADING INDICATOR OF THE CRB INDEXGold's role as a leading indicator of the CRB Index can be seen in Figures 5.12 and5.13. Figure 5.12 shows gold leading major turns in the CRB Index at the 1985 bottomand the 1987 top. (Gold also led the downturn in the CRB Index in 1980.) The 1985bottom in gold was more than a year ahead of the 1986 bottom in the CRB Index. TheDecember 1987 peak in the gold market preceded the CRB Index top, which occurredin the summer of 1988, by over half a year.FIGURE 5.12GOLD USUALLY LEADS TURNS IN THE CRB INDEX. GOLD BOTTOMED A YEAR AHEAD OF THECRB INDEX IN 1985 AND PEAKED ABOUT A HALF YEAR AHEAD OF THE CRB INDEX IN 1988.CRB Index versus Gold1985 through 1989
Figure 5.13 gives a closer view of the events entering the fall of 1989. Whilethe CRB Index has continued to drop into August/September of that year, the goldmarket is holding above its June bottom near $360. The ability of the gold marketin September of 1989 to hold above its June low appears to be providing a "positivedivergence" with the CRB Index and may be warning of stability in the general pricelevel. Bear in mind also that the "double bottom" in the gold market was itself beingforeshadowed by a pattern of "rising bottoms" in the deutsche mark. The sequence ofevents entering the fourth quarter of 1989, therefore, is this: Strength in the deutschemark provided a warning of a possible bottom in gold, which in turn provided awarning of a possible bottom in the CRB Index.The relationship between the dollar and the gold market is very important in forecasting the trend of the general commodity price level, and using a foreign currencymarket, such as the deutsche mark, provides a shortcut. The deutsche mark example in Figures 5.10 and 5.11 combines the inverse relationship of the gold marketand the dollar into one chart. Therefore, it can be seen why turns in the mark usually lead turns in the CRB Index. Figure 5.14 shows the mark leading the CRB Index in
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FIGURE 5.14THE DEUTSCHE MARK (OR OTHER OVERSEAS CURRENCIES) CAN BE USED AS A LEADINGINDICATOR OF THE CRB INDEX. IN 1985 THE MARK TURNED UP A YEAR AHEAD OF THE CRBINDEX. IN LATE 1987 THE MARK TURNED DOWN SEVEN MONTHS PRIOR TO THE CRB INDEX.Deutsche Mark versus CRB Index1985 through 1989
COMBINING THE DOLLAR, GOLD, AND THE CRB INDEX
71
FIGURE 5.15THE DEUTSCHE MARK VERSUS THE CRB INDEX FROM SEPTEMBER 1988 TO SEPTEMBER 1989.FROM DECEMBER TO JUNE, THE MARK LED THE CRB INDEX LOWER. THE "DOUBLE BOTTOM"IN THE MARK IN THE FALL OF 1989 IS HINTING AT UPWARD PRESSURE IN THE CRB INDEX.SINCE OVERSEAS CURRENCIES TREND IN THE OPPOSITE DIRECTION OF THE DOLLAR, THEYTREND IN THE SAME DIRECTION AS U.S. COMMODITIES WITH A CERTAIN AMOUNT OF LEAD
TIME.CRB Index versus Deutsche Mark
the period from 1985 through the third quarter of 1989. Figure 5.15 shows the markleading the CRB Index lower in May of 1989 (coinciding with bullish breakout in thedollar and bonds) and hinting at a bottom in'the CRB Index in September of the sameyear. Going further back in history, Figure 5.10 shows the major peak in the deutschemark and gold in the first quarter of 1980, which foreshadowed the major downturnin the CRB Index that occurred in the fourth quarter of that same year.COMBINING THE DOLLAR, GOLD, AND THE CRB INDEXIt's not enough to simply compare the dollar to the CRB Index. A rising dollar willeventually cause the CRB Index to turn lower, while a falling dollar will eventually push the CRB Index higher. The lead time between turns in the dollar and theCRB Index is better understood if the gold market is used as a bridge between theother two markets. At major turning points the lead time between turns in gold andthe CRB Index can be as long as a year. At the more frequent turning points that occur
at short-term and intermediate changes in trend, gold will usually lead turns in theCRB Index by about four months on average. This being the case, the same can besaid for the lead time between turns in the U.S. dollar and the CRB Index.Figure 5.16 compares all three markets from September 1988 through September1989. The upper chart shows movement in the U.S. Dollar Index. It shows a bottomin December 1988, a bullish breakout in May 1989, and two peaks in June andSeptember of the same year. The bottom chart compares gold and the CRB Indexduring the same time span. The December 1988 peak in gold (coinciding with thedollar bottom) preceded a peak in the CRB Index by a month. The setting of new lowsby gold in March of 1989 provided an early warning of the impending breakdownin the CRB Index two months later. The actual breakdown in the CRB Index in Maywas caused primarily by the bullish breakout in the dollar that occurred during thesame month.
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FIGURE 5.16A COMPARISON OF THE DOLLAR (UPPER CHART), GOLD, AND THE CRB INDEX (BOTTOMCHART). THE LATE 1988 BOTTOM IN THE DOLLAR PUSHED COLD LOWER, WHICH LED THECRB DOWNTURN. ALTHOUGH THE BULLISH BREAKOUT IN THE DOLLAR DURING MAY OF1989 PUSHED THE CRB INDEX THROUGH SUPPORT, GOLD HAD ALREADY BROKEN DOWN.IN THE FALL OF 1989, A FALLING DOLLAR IS PULLING UP GOLD, WHICH IS BEGINNING TOPULL THE CRB INDEX HIGHER.U.S. Dollar versus Gold versus CRB Index
Dollar peaks in June and September of 1989 (upper chart of Figure 5.16) coincidedwith "double bottoms" in gold, which may in turn be signaling a bottom in the CRBIndex. In all three cases, the dollar remains the dominant market. However, the dollar'simpact on the gold market is the conduit through which the dollar impacts on theCRB Index. Therefore, it is necessary to use all three markets in one's analysis.SUMMARYThe relationship between the U.S. dollar and bonds and stocks is an indirect one. Themore direct relationship exists between the U.S. dollar and the CRB Index, which inturn impacts on bonds and stocks. The dollar moves in the opposite direction ofthe CRB Index. A falling dollar, being inflationary, will eventually push the CRB Index higher. A rising dollar, being noninflationary, will eventually push the CRB Index
SUMMARY
73
lower. The bullish impact of a rising dollar on bonds and stocks is felt when thecommodity markets start to decline. The bearish impact of a falling dollar on bondsand stocks is felt when commodities start to rise.Gold is the commodity market most sensitive to dollar movements and usuallytrends in the opposite direction of the U.S. currency. The gold market leads turnsin the CRB Index by about four months (at major turning points, the lead time hasaveraged about a year) and provides a bridge between the dollar and the commodityindex. Foreign currency markets correspond closely with movements in gold and canoften be used as a leading indicator for the CRB Index.In the next chapter, a mere direct examination of the relationship between thedollar, interest rates, and the stock market will be given. A comparison of the CRBIndex to the stock market will also be made to see if any convincing link existsbetween the two. Having already considered the important impact the dollar has onthe gold market, the interplay between the gold market and the stock market will beviewed.
6The Dollar VersusInterest Rates and Stocks
THE DOLLAR AND SHORT-TERM RATES
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the dollar and interest rates for now. A falling dollar, being inflationary, eventuallypushes interest rates higher. Rising interest rates make the U.S. dollar more attractiverelative to other currencies and eventually pull the dollar higher. The rising dollar,being noninflationary, eventually pushes interest rates lower. Lower interest rates,making the U.S. currency less attractive vis-a-vis other currencies, eventually pullsthe dollar lower. And so on and so on.Given the preceding scenario, it can be seen how closely the dollar and bondsare linked. It is also easier to see why a rising dollar is considered bullish for bonds.A rising dollar will eventually push interest rates lower, which pushes bond priceshigher. A falling dollar will push interest rates higher and bond prices lower. Bondprices will then impact on the stock market, the subject of Chapter 4. The mainfocus of this chapter is on the more direct link between the dollar and interest rates.Although the dollar will be compared to the stock market, the impact there is moredelayed and is more correctly filtered through the bond