Sunday, March 28, 2010

Chart of the Week: Impact of Falling Euro on Stocks and Commodities

Given all the general economic problems facing Europe and the sovereign debt issues related to Greece and the PIIGS (Portugal, Italy, Ireland, Greece and Spain), it is not surprising that the euro has come under so much selling pressure as of late.

Considering that the dollar index is comprised of a weighted basket of foreign currencies of which the euro comprises 57.6%, it is not too much of a stretch to think of the dollar as an inverse euro – as their almost mirror image in the chart below suggests. So given that recent weakness in the euro is accounting for most of the dollar’s resurgence and the dollar has a strong influence on the prices of commodities and stocks, it is meaningful to consider how the fluctuations in the euro have translated into changes in stocks and commodities.

This week’s chart of the week looks at ETFs for the euro (FXE), dollar (UUP), stocks (SPY) and commodities (RJI) for the last 15 months. Following the bottom of the stock market in March 2009, the euro (red line) rallied in concert with the S&P 500 index (blue line) and commodities (green line) through December 2009. As the euro began to weaken, however, both stocks and commodities initially continued their bullish climb, before selling off in January and the beginning of February. Since the early February lows, stocks (SPY) have managed to rally in spite of a weakening euro and firming dollar (purple line). Commodities, which tend to react more strongly to currency fluctuations, have struggled much more with euro weakness and dollar strength. Should the euro continue to fall, it is reasonable to expect stocks to continue to outperform commodities and of course euro weakness to directly lift the dollar to new heights.

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