U.S. dollar strength keeps risk assets in check
The Sandbox Daily (1.7.2025)
Welcome, Sandbox friends.
Today’s Daily discusses:
dollar strength spells trouble for stocks
Let’s dig in.
Blake
Markets in review
EQUITIES: Dow -0.42% | Russell 2000 -0.74% | S&P 500 -1.11% | Nasdaq 100 -1.79%
FIXED INCOME: Barclays Agg Bond -0.35% | High Yield -0.33% | 2yr UST 4.293% | 10yr UST 4.687%
COMMODITIES: Brent Crude +1.13% to $77.16/barrel. Gold +0.64% to $2,664.3/oz.
BITCOIN: -4.91% to $96,914
US DOLLAR INDEX: +0.41% to 108.669
CBOE TOTAL PUT/CALL RATIO: 0.80
VIX: +11.10% to 17.82
Quote of the day
“Failure is the condiment that gives success its flavor.”
- Truman Capote
Dollar strength spells trouble for stocks
From the September low, the U.S. Dollar Index has rallied 8.5%. Since the election, it is up over 5%.
While most uptrends have come under pressure over the last month, the rally in the dollar has remained strong – and stands out amidst the chop.
The U.S. Dollar Index – a geometrically-weighted basket of six currencies consisting of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc – has been negatively correlated with equities over the last 5 years. Meaning, as the U.S. Dollar is strengthening, stocks are generally weaker, and vice versa.
The reasons for the U.S. dollar rally are well understood.
American exceptionalism in terms of better economic growth, faster productivity growth, superior equity market performance, and higher yields all act as a collective magnet for attracting capital to the United States. With the Federal Reserve expected to cut rates less than most other major central banks, expected interest rate differentials favor the greenback. Also, tariffs will restrict the flow of goods leading to fewer dollars going abroad and reducing the demand for foreign currency.
With dollar sentiment incredibly bullish and the dollar already modestly overvalued, much of these fundamental undertones should already be baked into the price.
Shortfalls in inflation and higher unemployment could take the dollar lower. But, restricting trade flows could lead to a shortage of dollars abroad needed to service dollar-denominated debt and pay for goods and services in dollars, which could lead to a rise in the usage of stablecoins backed by the U.S. dollar and therefore greater dollar demand.
For now, the dollar is trading around a key inflection point. Traders are looking at a key level around $107-108 (depending on weekly vs. monthly candles), which represents a key Fibonacci level this cycle.
Should the dollar continue its 3-4 month ascent higher, expect risk assets to remain under further pressure and a messy tape going forward.
If the dollar stabilizes or breaks down from here, then it should be party on for the bulls.
Source: YCharts, All Star Charts
That’s all for today.
Blake
Questions about your financial goals or future?
Connect with a Sandbox financial advisor – our team is here to support you every step of the way!
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
Please see additional disclosures at the Sandbox Financial Partners website: