Dollar Bears Mercifully Silent

We can measure the shape of these curves by taking the forward rate between six and nine months -- the rate at which you can lock in borrowing for three months starting six months from now -- and dividing it by the nine-month rate. The more this ratio exceeds 1.00, the looser the monetary policy is expected to be. Critically, these forward-rate ratios are comparable across economies and across interest rate levels.

If we compare these forward rate ratios for the dollar and for the euro as reconstructed back to 1992, we see how U.S. monetary policy was significantly looser than Eurozone monetary policy over that period, as depicted in the pink shaded areas. This included the periods of 1992-1994 and 2001-2005, both of which saw a declining dollar. The periods wherein U.S. monetary policy was tighter, highlighted in orange and with blue rectangles, include late 1995, 1999-2000 and -- you guessed it -- today. All of these periods coincide with dollar strength.

Given the Federal Reserve's rate-hiking stance and the unwillingness of les poulets at the European Central Bank to follow suit, we have every reason to expect dollar strength to continue.

Money Market Steepness

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Source: Bloomberg

Winners And Losers

Let's return to an analytic technique first introduced here in February and used several times since: measuring the relative impact of a market factor on industry groups. Negative numbers in the table below indicate groups benefiting from weakness in that currency against the dollar, while positive numbers indicate groups hurt by weakness in that currency against the dollar. The groups with statistically significant relationships (90% confidence interval) against the large-cap S&P 500, the mid-cap S&P 400 and the small-cap S&P 600 are displayed for the euro, the Japanese yen and the Canadian dollar.

For the euro, the list of victims is clear. Groups involved with oil and gas, the housing and housing-related financial groups and basic materials groups in steel, aluminum and chemicals all should be hurt by a weaker euro. These industries have the common thread of either being hurt directly by higher interest rates or by having their dividends rendered less attractive by higher interest rates.

Beneficiaries are concentrated in health-care services, pharmaceuticals, specialty retailers and in diversified commercial services. These industries have the common thread of either being export-dependent or having consumers relatively enriched by the stronger dollar. If higher energy costs crimp consumer spending, a stronger dollar restores it somewhat.

Euro Betas

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Source: Bloomberg

Groups hurt by a weaker yen also have a heavy representation in basic materials such as steel, aluminum, gold, specialty chemicals and metals, and mining. Housing and housing-related issues are hurt as well. In all cases, the same comments made for the euro's impact apply.

Groups benefiting from a weaker yen include motorcycle manufacturing, -- that's Harley-Davidson(HDI) -- pharmaceuticals, health care services, retail and distribution-oriented industries and both distillers and brewers. If you are planning to get drunk and rowdy and ride around on your Hog, now is the time to do it.

Yen Betas

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Source: Bloomberg

Finally, let's take a look at our largest trading partner, Canada, and the impact of its dollar on U.S. stocks. Groups hurt by a weaker Canadian dollar are largely the same as those noted for the euro and yen but include a strong representation in utilities as well.

Beneficiaries of a weaker Canadian dollar overlap those for both the euro and yen, but include a few eyebrow-raisers such as airlines and casinos and gambling as well.

Canadian Betas

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Source: Bloomberg

If any of this can be summarized while holding a lit match, it would be this: "A stronger dollar produced by higher interest rates is going to shift market gains from tangible resource issues to consumer-dependent issues."

And if there's any flame left on that match, use it to ignite the collected writings of last year's dollar bears. If that keeps your house warm for a few minutes this winter, their wrongheaded scribbling was not a total waste.

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