That’s lured equity investors in droves -- Bank of America Merrill Lynch’s clients poured $212 million into energy equities, primarily mid-caps, for the week ending July 24. They’ll be rewarded if the dollar continues to weaken, according to Jim Paulsen, chief investment strategist at Leuthold Group.
“Should the U.S. dollar break below its recent trading range, it seems likely the price of crude oil will rise toward $60 at least and energy stocks could be market leaders again for a period,” he wrote in a client note Aug. 1.
Bonds
The dollar’s swoon hasn’t had as clear an impact on the global bond market -- not altogether unsurprising since currencies are driven by interest rate differentials, giving bonds the leading role.
While some have argued that a weak dollar may export deflation to the rest of the world, boosting bonds abroad, that notion “gets precisely backwards domestic inflation dynamics and the links between dollar strength or weakness and global activity,” said Bespoke Investment Group macro strategist George Pearkes.
Instead, local currency gains versus the dollar lead to a lending boom, according to Hyun Song Shin, head of research at the Bank for International Settlements.
“When the local currency appreciates, local borrowers’ balance sheets become stronger, resulting in lower credit risk and hence expanded bank lending capacity,” he said in a 2014 paper.
Neil Dutta, head of U.S. economics at Renaissance Macro Research, similarly suggests that dollar weakness that makes Treasuries more attractive to overseas buyers will ultimately boost yields abroad.
“The causality runs from U.S. to the rest of the world,” he said. “So, if a weak U.S. dollar pushes up U.S. yields through growth and inflation effects, I’d think global yields rise too."
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