Optimism regarding stability around current levels encouraged buyers to come back into the market last week, bottom fishing various beaten down stocks. The major U.S indices closed up by over 10%, forming weekly bullish engulfing candlestick formations on various charts. Even though economic stress is still weighing on the economy, affecting different sectors, expectations of a brighter future in the distance are now sending investors back into stocks, trying to grab opportunities at discount prices. To date, analysts are still expecting to see more of a sluggish economy, an economy that will continue to contract until the end of this year and throughout the beginning of next. In addition, unemployment is expected to continue to rise from its current level of 6.1% during the next couple of months, making the current economic slowdown one of the longest and harshest ones since the 70’s.
A lot of important economic data came out last week, among them a GDP result showing that the U.S economy had contracted in the third quarter by 0.3% and a rate cut in the U.S, which brought its fund rate down to 2002’s levels of only 1%. To date the U.S is yielding investors one of the lowest interests among financial investments and according to the Fed, additional rate cuts might not be so far off. With interest differentials of over 4% between the U.S and other economies, traders have become puzzled why the U.S Dollar is gaining strength.

Can the Dollar be rising while stock markets are gaining strength?
When learning basic economics, every novice learns apart from the basics of supply & demand and the Keynes theory, that interest rates affect the different financial securities in various ways. Rising interest rates are good for a currency as it attracts investments due to high yielding interest, but it is bad for the stock market as a rising central rate affects rates within the economy, offering better alternative’s for investors than a risky stock market, while depressing demand as borrowers end up paying higher returns.
Under normal market conditions we would expect to see that as the Fed plays with its rates to control healthy economic growth, dollar and stocks trade in opposite directions. As one goes up for a period of time the other goes down (within their major trends).
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