The U.S. Dollar's Potential Rise Signals More Problems for Stocks

The U.S. dollar is poised to make a significant move as it completes its first "golden cross" since July 2021. This has raised concerns for stocks and traders are closely monitoring the situation.

Currently, the 50-day average on the ICE U.S. Dollar Index DXY stands at 103.15, surpassing the 200-day moving average of 103.11. This indicates a potential upward trend in the value of the dollar against its major counterparts, particularly the euro.

As of Friday, the index reached 105.47, reaching its highest level since March 10, 2023. This was the day that witnessed the collapse of Silicon Valley Bank, leading to a brief surge in safe-haven assets like the dollar.

A "golden cross" occurs when the 50-day moving average closes above the 200-day moving average. It is considered a significant signal by technical analysts and often signifies momentum in a particular direction.

Conversely, a "death cross" happens when the 50-day moving average falls below the 200-day moving average. The U.S. dollar experienced a "death cross" on January 10, leading to a six-month downtrend that reached its lowest point in 2023 on July 14. However, since then, the dollar has been steadily rising and some currency strategists believe this trend may continue, especially after the Federal Reserve revised its interest rate forecast to remain above 5% until 2024.

Overall, with the U.S. dollar's potential rise and its first "golden cross" in months, investors are cautiously watching for any implications it may have on stocks and global markets.

The Dollar's Continued Climb: A Golden Opportunity

An analysis by Dow Jones Market Data reveals that the dollar tends to experience a steady increase in value during the three months following a golden cross. On average, it gains 1.9% and trades higher 79.2% of the time. Over a one-year period, however, the performance becomes more mixed, with the dollar being higher 58.3% of the time and experiencing an average gain of 1.5%.

Interestingly, historical data suggests that the recent gains of the dollar might just be the beginning of a larger surge. Back in July 29, 2021, there was a previous golden cross, which led to an impressive rally. The dollar index soared approximately 25%, starting from around 91 and reaching nearly 115 by late September 2022. This peak marked the currency's strongest level in twenty years, according to FactSet data.

Despite these positive developments, some analysts caution about the potential challenges that the dollar's advance, coupled with rising Treasury yields, could pose for stocks. The S&P 500 suffered a significant setback on Thursday, recording a drop of more than 1.6% in a single day - its largest decline since March 22, as reported by Dow Jones Market Data.

Jeffrey deGraaf, a technical strategist at Renaissance Macro Research, noted in a message to clients that "a new cycle high in yields and a golden-cross in the dollar are strong headwinds for the market." It seems that while the dollar soars, other asset classes may experience some turbulence.

As the era of the golden cross continues, investors eagerly await the next moves in the ever-evolving financial landscape.