The U.S. Dollar Index (DXY) is on track to close the week at its lowest level since 2022.
If you listen to the popular narrative, that weakness is the reason stocks have been able to rip higher.
The story goes like this: A falling dollar fuels global liquidity, boosts multinational earnings, and lights the match for a bull market.
But what if that logic has it backwards?
What if the weaker dollar is not the cause of this bull market, but the result of it?
For decades, the U.S. dollar has functioned as a safe haven.
When investors get nervous, capital flows into dollars. When fear rises, demand for safety rises with it. The dollar benefits.
So what does it mean when the dollar is making multiyear lows in the middle of a broadening bull market?
Maybe it’s not about debasement. Maybe it’s not about the end of fiat currency. Maybe it’s much simpler than that.
In an environment where investors are embracing risk across sectors, countries, and asset classes, who needs the ultimate safe haven?
Instead of asking what a weaker dollar is doing to stocks, maybe we should be asking what stocks, and risk assets around the world, are doing to the dollar.
Let’s look at the evidence.
US Dollar Hits New Lows
If the dollar is breaking down, the first place most people look is the U.S. Dollar Index. That makes sense. It’s the benchmark.
But it’s important to understand what’s actually inside that index.
The DXY is a basket of developed-market currencies. The euro makes up more than 57% of it, with the rest split among the British pound, Japanese yen, Swiss franc, Canadian dollar, and Swedish krona.
In other words, when the DXY falls, it’s mostly telling us how the dollar is behaving relative to those other developed economies.
So let’s push further out on the risk curve.
What happens when we strip out those developed-market currencies entirely and focus only on emerging markets?
Take a look at the WisdomTree Emerging Currency Strategy Fund (CEW), an equally weighted basket of 15 emerging-market currencies.
CEW just closed at its highest levels since 2018:
Look at what’s inside that fund.
We’re talking about currencies like the Thai baht, Polish zloty, Mexican peso, and Korean won. These are not the types of currencies investors pile into when they are scared and hiding in cash.
They are pro cyclical. They are growth sensitive. They thrive when capital is flowing toward opportunity, not away from it.
So is this really about some grand dollar debasement story?
Is this the end of fiat currency as we know it?
Or is it simply another data point showing that investors around the world are embracing risk?
When emerging market currencies are breaking out after years in the wilderness, it’s hard to argue that fear is driving the bus.
And if the currency side of the risk spectrum is confirming this appetite for risk, it shouldn’t surprise us to see the same thing happening in emerging-market stocks.
Emerging Markets All-Time Highs
Last week, we made the case that the breakout in emerging market stocks might be one of the most important charts in the world right now.
The move to new all-time highs is not happening in isolation. It reflects rotation.
Capital is moving away from crowded mega-cap U.S. technology stocks and into other risk assets.
Participation is expanding. Leadership is changing. That’s what healthy bull markets do.
Most investors track emerging markets through the iShares MSCI Emerging Markets ETF (EEM). The problem is that nearly 27.5% of that fund is China.
So let’s take China out of the equation completely.
The iShares MSCI Emerging Markets ex China ETF (EMXC), which removes China from the index, is actually doing even better:
China is up just 3% so far this year. EMXC is up more than 13%.
Even last year, when China had its big 28% run, EMXC gained more than 35%.
This is not a China trade.
It is not a dollar collapse trade.
It is not some grand macro debasement thesis finally coming true.
It is a risk appetite story. It is a global rotation story. It is money moving toward opportunity.
When emerging-market currencies are breaking out and emerging-market equities are printing fresh all-time highs, that’s not fear. That’s demand.
Maybe the dollar is not falling apart.
Maybe it’s just not needed.
Because in a broad, expanding bull market, investors do not hide.
They hunt.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs