Rather than buying stocks now in anticipation of a year-end rally, buy the U.S. dollar instead.
Just about no one is expecting a bounce in the buck. Indeed, almost everything I’ve read about the dollar over the past few months has been bearish.
That sentiment sets up one heck of a contrarian trade.
Of course, I made a similar argument back in July when I first turned bullish on the buck. And, I doubled-down on that bullishness in August. Yet, the buck has done nothing. The US Dollar Index (USD) was at 97.33 in July. It closed on Wednesday at 97.89.
Critics will argue that 11 weeks of “go-nowhere” action proves my bullish argument is wrong. I’ll argue that 11 weeks of going nowhere when most of the financial media was calling for “the death of the dollar” is a sign that the selling pressure is exhausted.
And, in this condition it only takes a small amount of buying pressure to spark a rally.
We’re starting to see that buying pressure kick in right now.
Take a look at this chart of the US Dollar Index…
The blue arrows on the chart point to when the Fed lowered the Fed Funds interest rate target in September 2024, and when it lowered rates again two weeks ago.
Prior to both of these interest rate cutting cycles, the widespread belief was that lower short-term rates would lead to lower long-term rates. That belief put selling pressure on the dollar ahead of the rate cuts – since currencies fluctuate based on the expectations of long-term interest rate direction.
Last year, though, as soon as the Fed cut its Fed Funds rate, long-term rates started to rise. And, the dollar started to rally.
That rally continued all the way through the end of the year – despite the Fed cutting rates two more times.
Now, look at the setup in the buck right now…
As soon as the Fed cut short-term interest rates two weeks ago, longer-term rates started to rise.
And, the dollar started to rally.
Investors expect the Fed to cut short-term rates two more times between now and the end of the year. If long-term rates rise just as they did last year, then the dollar should rally as the market prices in the expectations for higher long-term rates.
So, it’s quite possible the most surprising rally to come in the fourth quarter of 2025 will be in the US dollar.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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