[]The U.S. dollar, which rallied to a two-month high on Thursday, is demonstrating a bullish signal from a technical perspective and has the potential to trend up in the coming months, according to Sevens Report Research.
[]The greenback’s strength will weigh on equities, starting by the beginning of June, noted Tom Essaye, founder of Sevens.
[]The ICE U.S. Dollar Index DXY, -0.38%, which measures the currency’s strength against a basket of six major rivals, is up about 1.3% over the past month to above 103 on Friday, according to Dow Jones Market Data. It is still down almost 10% from its 53-week high reached in September.
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[]Read: The latest threat to stocks? A resurgent U.S. dollar.
[]From a technical perspective, there are signs that a potential bottom for the dollar has been formed, Essaye noted.
[]The Dollar Index has been holding above 101, a key support level, according to Essaye. Meanwhile, a downtrend of the dollar starting in October failed to hold since last week, Essaye noted.
[]“If we are on the brink of a new leg higher in the Dollar Index, expect that to become a renewed source of pressure on the broader U.S. equity market,” Essaye wrote.
[]A stronger dollar is negative for U.S. stocks, as it often weighs on overseas sales for U.S. companies. Roughly 40% of S&P 500 companies’ revenue are generated outside of the U.S., Essaye noted.
[]The dollar rallied during several, past bear markets for stocks, including the dot.com bubble burst in 2000, the 2007-2008 great financial crisis and the COVID pandemic that began in 2020.
[]Last year, the U.S. dollar climbed while stocks traded lower. The Dollar Index peaked in late September, two weeks before stocks reached their lowest levels of the year. The S&P 500 hit a cyclical low at 3,577.03 on Oct. 12, 2022, according to Dow Jones Market Data.
[]If the dollar and stocks follow a similar pattern this year, equities may begin to feel the effects of a stronger dollar by the start of June, Sevens noted.
[]The Dow Jones Industrial Average DJIA, -0.33% ended Friday down 0.3%, up 0.4% for the past week, according to FactSet. The S&P 500 was down 0.1% Friday, up 1.7% for the past week. The Nasdaq Composite COMP, -0.24% lost 0.2% Friday and gained 3% for the week.
