The dollar's demise resumed Tuesday, but the
doomsday scenario -- currency weakness prompting a flight from dollar-denominated assets -- remained unfulfilled, much to the chagrin of hard-core bears.
After initially trading lower in sympathy with the dollar, major stock proxies rebounded sharply and ended at session highs in a clear victory for the bulls.
After trading as low as 9536.02 early on, the
Dow Jones Industrial Average
recovered to close up 0.6% to 9654.61. The
rose 0.5% to 1039.25 vs. its intraday low of 1026.19, while the
ended up 0.8% to 1907.85 vs. its nadir of 1878.60.
Individual names contributing to the advance included
. Notable losers included
Volume was relatively modest at 1.2 billion shares on the
and 1.8 billion over the counter, while breadth favored advancers by about 19 to 12 in both venues.
While disappointed again, bears can cling to the potential that a "double top" has occurred. Major averages have repeatedly been turned back in recent days after approaching the intraday highs of Sept. 19. Those levels -- of around 9686 for the Dow, 1040 for the S&P and 1913.75 for the Comp -- are the next major hurdles for a market that continues to defy its critics.
Despite repeated disappointments, determined skeptics remain convinced that dollar weakness will ultimately lead to less demand for stocks and Treasuries among foreigners, if not outright repatriation by such investors. However,
second-quarter data, the most recent available, suggested otherwise; net foreign purchases of U.S. stocks, Treasuries and corporate bonds were all up vs. the first quarter, while the level of selling of U.S. agency paper fell.
Not Fade Away
Tuesday's market action showed little evidence of change in those trends, particularly with regard to equities, which rose for a fifth-straight session.
The dollar's slide reportedly contributed to weakness in Treasuries, where the benchmark 10-year note fell 20/32 to 100, its yield rising to 4.25%. But the stock market's rebound and supply concerns also weighed on Treasuries. (The government plans to sell $16 billion of five-year notes and $9 billion of 10-year inflation-protected securities (TIPs) Wednesday amid a heavy corporate bond calendar, including Tuesday's $1.75 billion note sale by
and planned $1 billion offering by
There is concern that the recent G7 directive regarding the desirability of "more flexibility in exchange rates" will cause further dollar weakness and ultimately temper the demand of foreign central banks for Treasuries, said Michael Ryan, chief fixed-income strategist at UBS Financial Services.
When foreign central banks intervene in currency markets, they commonly reinvest the dollars purchased in Treasury securities; such buying helped foreigners accumulate more than 40% of outstanding Treasuries. Therefore, their appetite to own Treasuries going forward is considered key to the dollar's fate.
"I'm not saying foreigners will become net sellers but with increased supply, that complicates the outlook for Treasuries over the balance of this year and into next," Ryan said. "But that alone is not enough to make me bearish" on bonds.
Foreign central banks "don't want to see the dollar in free fall, because that is going to weigh on their economies," he observed. "They're going to try to temper any decline in the dollar."
Ironically, comments suggesting indifference about the euro's recent rise by various European finance ministers helped spur the early dollar selling. But Japanese Economics Minister Heizo Takenaka was quoted as saying the Japanese government will "ensure that order is in place" if "the speed of the move in exchange rates is too rapid," echoing similar comments earlier this week by Finance Minister Sada-kazu Tanigaki.
Indeed, intervention by the Bank of Japan -- or at least the threat thereof -- was credited for the dollar's meager comeback attempt from its intraday low of 109.37 yen, its lowest level since November 2000. In late New York trading, the dollar was quoted at 109.81 yen vs. 110.91 yen late Monday. Elsewhere, the euro rose to $1.1770 from $1.1718 while the Canadian dollar reached a seven-year high. The Dollar Index fell 0.5%.
As is often the case, weakness in the dollar coincided with strength in gold, which is still recovering from last Friday's thumping. Gold futures rose 1% to $377.10 per ounce vs. the late-September high around $394 per ounce.
Many of those bullish on gold are often quite bearish on the buck and, by extension, U.S. stocks and bonds, too. Many are braced for a crash in the dollar and believe its recent weakness is the start of a more draconian process that will ultimately lead to inflation and other economic damage.
Although the Sept. 22
G7 directive was a "trigger for the market to do something that needed to be done anyway" -- i.e., continue to address the imbalances represented by the record-high U.S. current account deficit and low U.S. savings rate -- there's a "very good chance" the dollar will avoid a disorderly decline, countered Mark Dow, who manages fixed-income funds for MFS Investment Management in Boston.
Dow, who worked as a staff economist at both the International Monetary Fund and U.S. Treasury before joining MFS, suggested the flexibility of U.S. labor markets and lack of "price rigidity" in goods will mitigate any inflationary pressures generated by a weaker dollar. Furthermore, because exports account for only about 12% of U.S. GDP, "it's harder to get a disorderly 'knock-on' effect on the overall economy even with a relatively sharp move in currencies," he said. (For example, while the 1985 Plaza Accords prompted a sharp dollar decline, there was no marked effect on GDP or inflation, Dow recalled.)
Finally, there's "huge elasticity of demand for Treasuries" amongforeigners and domestic asset-allocators, he observed, noting Treasuriescontinued to rally in late September even after the dollar started swooningpost-G7. "Never say never but that means the
dollar's adjustment is likelyto be orderly."
Perhaps growing confidence that the dollar's decline can be managed or contained means the greenback is more susceptible to a nastier fall. But, to date, policymakers have been able to engineer a fairly orderly decline, and equity market participants paid only passing attention to the dollar's fate on Tuesday.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.