Dollar drop a danger sign for stocks
Commentary: Foreigners are now losing both ways
By Tomi Kilgore, CBS.MarketWatch.com
Last Update: 12:02 AM ET April 29, 2002
NEW YORK (CBS.MW) -- If things get bad enough, sometimes the follower evolves into the leader.
The U.S. dollar had been declining in an orderly fashion since the beginning of the year, but the buck's recent acceleration to the downside has made other markets take notice.
"The euro continues to gain [against the dollar] primarily on the back of eroding earnings sentiment on Wall Street... and the Dow's breach of the 10,000 level," said Ashraf Laidi, chief currency analyst at MG Financial Group. He added that it was also representative of the lack of trust foreigners currently have with U.S. companies and of the lack of confidence in the feasibility of the financial markets.
On Friday, the dollar fell against the euro currency (C_EUR: news, chart, profile) to its lowest level in since the beginning of January, and dropped to its lowest level in over a month against the yen (C_JPY: news, chart, profile).
Is that such a big deal for Wall Street, since it was Wall Street that led the way?
Laidi believes that the tables will be turned if the buck's slide continues. Wall Street will no longer inflict dollar weakness -- it will become the victim.
Foreigner investors must purchase dollars to buy U.S. equities. They can live with some currency losses as long as they make it back on their stock investment.
"It's one thing to lose money in the stock market but make it up on the currency, and it's one thing to lose money in the currency and make it up in the market," said Frank Gretz, chief technical analyst at Shields & Co, in a research note to clients. "But losing both ways, that really hurts."
Feeling the pain
As America and its financial markets began rebuilding in the aftermath of the Sept. 11 tragedy, the dollar had been trending higher versus the euro (see interactive java chart). You can visualize this by drawing a "trendline" (see previous column) that connects the mid-September low to its lows of early January and April.
Then on April 17, however, the "trend" was abandoned.
(Note that the chart reflects change in the number of euros per dollar, while the conventional quote for the currency pair is dollars per euro.)
Supporting the view that further declines may be coming is a bearish "descending triangle."
Click on "Draw trendlines," place the cursor on the Jan. 23 low and drag it horizontally through the present, touching the lows of March 21 and April 11. Then draw a descending line connecting the highs of February and March. It may not be perfect, but it's close enough of horseshoes and technical analysis.
The dollar had busted out of the right triangle on the same April 17.
You can calculate the minimum objective of a triangle break by subtracting the triangle's height (you can use the difference between the Feb. 1 high and the Jan. 23 low -- 0.031) from the point of the breakout (about 1.131). The objective is approximately 1.100.
Friday's close of around 1.111 was the top of what David Solin, partner and technical analysts at FX Analytics, sees as a support level (1.111 to 1.109). He suggests not getting "too excited" until that area gives way. Down below, he expects support to surface at 1.107 and at 1.099.
The dollar's pain is also the yen's gain
The dollar's weakness wasn't isolated to the euro. The Japanese yen was also a beneficiary.
Following a sharp spike lower in early March (see java chart), the dollar rebounded to make another attempt on its January through February highs around 135. It fell about a yen short in early April and has been declining rapidly ever since. The pace picked up last Thursday and Friday, when the dollar broke below a trendline plotted using the September and March lows.
At first glance, it looks like the chart is forming an ominous "double-top" reversal pattern (see previous column). Not so fast, as the dip between the tops has to be penetrated for the pattern to be completed.
It still has another yen or so to go.
Who's the victim?
"Foreigners buy the big caps, the well-known names, the S&P 500," Gretz noted. "If a declining 'market' and a declining dollar causes some foreign exit, it will be the S&P 500 that they're exiting."
They may have not yet left the building, but they are certainly being handed their hats.
S&P 500 Index ($SPX: news, chart, profile) closed Friday down 15.16 at 1,076.32, its fifth straight losing session. It has fallen within 2 points of its Feb. 20 low (1,074.36).
Meanwhile, Standard & Poor's chief technical analyst Mark Arbeter sees a "minor layer" of chart support for the S&P 500 down to 1,050, and believes the index "will hold above this level."
If it doesn't? Riding the reddening greenback, bears will set their sites on the Sept. 21 low of 944.75, where the market's, and America's, outlook was the darkest.
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