Bob Pisani, welcome to 6 months ago

Posted on | Thursday, September 24, 2009 | No Comments

The stock market is again beholden to the dollar. The Dollar Index hit a 52 week low recently, but as it began rallying after the FOMC report yesterday, stocks weakened.

It happened again today: as the existing home sales number came in weaker than expected, the dollar rallied again, and stocks dropped. When the dollar stabilized mid-morning, so did stocks.

How long will this last? It may last for a while. What matters with currency trading is interest rates, and the Fed clearly indicated yesterday there is little chance interest rates are going up any time soon. This gives currency traders carte blanche to go sell the dollar relentlessly, borrow dollars cheap and use it to buy higher yielding assets.

But why did the dollar rally on a weak existing home sales report? Normally, a poor economic report would indicate that the Fed would keep rates lower longer, which would support a weak dollar.

The reason is that there seems to be a new type of trade: the dollar has replaced the yen for the carry trade.

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