Investors are worried about the dollars in their bank accounts…

They’re right to be concerned… but they’re worried for the wrong reasons.

As we all know, Americans are suffering from sky-high inflation. The US government’s most recent inflation measure came in at 8.5%, meaning the dollar has lost 8.5% of its value over the past year.

That’s down from June when inflation clocked in at 9.1%, the highest reading since 1981.

In short, the buck is buying less and less food, gas, and housing every month.

But this weakness is masking an important danger… one that’s looking more and more likely to hit the US stock market hard.

If this danger comes to fruition, the US stock market will almost certainly resume the downtrend it had been suffering before its recent “relief rally.”

I’ll show you this danger today… how to monitor it… and how to protect your money from it.

• The US dollar is by far the world’s most important currency…

More than 50% of the world’s transactions are settled in US dollars.

It also makes up 59% of central bank reserves, according to the International Monetary Fund. That’s nearly triple the euro’s 20% share.

Finally, most of the world’s commodities, including oil, are priced in dollars.

This is why many call the greenback “King Dollar.” Big moves in the dollar reverberate around the world. They shake the global financial system and cause big swings in the price of stocks, bonds, and commodities.

• The dollar is usually stable…

Most of the time, the price of the dollar doesn’t move around much vs. other currencies.

But the dollar has been anything but stable lately.

Take a look at this chart of the US Dollar Index’s performance over the past three years. This index measures the dollar’s performance versus other currencies like the euro, Japanese yen, and the British pound.

Since January 2021, the dollar has surged more than 21%.  

Source: StockCharts

These kinds of moves in the dollar are extremely rare. In fact, this surge has pushed the dollar to its highest price in over 20 years.

Why? Because…

• Practically every major currency in the world has been bleeding out versus the dollar.

For better or worse, investors view the US dollar as a safe haven.

Investors are nervous today. Who can blame them? The economy, inflation, and ongoing energy crisis have rocked markets. Investors have fled into the dollar, pushing its price beyond 20+-year highs.

That’s a problem because an “up” dollar usually leads to a “down” stock market.

The US stock market peaked in January… precisely when the dollar starting ripping higher. And the “relief rally” staged by US stocks this summer came while the dollar took a breather. From mid-July to mid-August, the dollar declined about 3% while the S&P rallied about 14%.

But now, the US dollar is looking more and more likely to resume its march higher vs. other global currencies.

Not only is the dollar index touching its 20-year highs again…

Its global rivals like the euro and yen are plunging through the floor.

Take a look at the euro—which accounts for 58% of the US dollar index.

• The euro is in serious trouble.

It’s plunged 20% since its 2021 highs… and is now plumbing 20-year lows.

Source: StockCharts

But it’s not just the charts that are pointing to a weaker euro.

As I’m sure you’re aware, Europe is in the middle of a major energy crisis. There’s a major war taking place in Ukraine. And inflation across Europe is in the double digits—even worse than in the US.

• The Japanese yen is also on the ropes…

The yen is the third most used global currency—after the euro and dollar.

It’s fallen 24% since the start of 2021, and is now trading at its lowest level since the late 1990s!

Source: StockCharts

• If the dollar truly begins another leg up… it’ll put a ton of pressure on stocks.

Here’s where the US Dollar Index stands today. As you can see, it’s flirting with a breakout beyond its 20-year highs. But it hasn’t broken out yet.

Source: StockCharts

Two things can happen from here.

One, the dollar breaks out above 110. If it does, it could easily rally over the next few months to 120. That would lead to a lot more volatility and declining stock prices. Expensive stocks, growth stocks, and speculative stocks would likely be hit hardest.

At the same time, there’s a chance the US Dollar Index tops out—at least temporarily—around its current level of 109.

If that happens, investors should breathe a sigh of relief. A stable or falling dollar would mean less volatility, and that could give stocks a chance to run.

Justin Spittler
Chief Trader, RiskHedge