Long Stock Market Rally and the Dollar

Wall Street has rallied for 5 consecutive weeks. This has contributed to the weakening of the dollar. This week, the stock market is challenged by a flood of reports that might stop the rally. Will the dollar make gains?

Wall Street has enjoyed an uncommon 5 week rally. Stocks rose on good news and lots of hope. Geithner’s Toxic Asset plan sent bank stocks to the sky, and this pulled other stocks. Positive housing data sure helped.  

The G20 summit, that turned out to be a success, gave hope to traders. And, the FOMC’s statement about printing dollars and lowering yields was also positive for the stock market.  While this huge spending is bad for the dollar, it helped the stocks rise. Larry Summers also showed hope.

With stocks rising, fears fell. Risk appetite helped stocks as well as currencies: the Euro, Pound, Swissy,Aussie, Kiwi and Loonie gained. You might have noticed that a major currency has been left out – the Yen of course…

Flood of Reports on Wall Street

This week, lots of companies will report their results for the first quarter: Goldman Sachs, Johnson & Johnson, Intel, JP Morgan, Google, Citigroup and GE are among the companies that will reports this week.

The first quarter was bad. Everywhere. If the reports are very disappointing, fears will grow again, and the pattern that we’ve seen in the last few weeks will reverse. The Pound might finish its rally and the Euro will give in to its problems and dive under 1.30.

On the other hand, if these reports are positive, and the rally will continue for a sixth consecutive week, the dollar won’t gain, or might weaken.  

Banking Stocks

The most interesting stocks for forex traders are the stocks of the banking sector: banks have been in the limelight of the current financial crisis and have received lots of government dollars that weighed on the US dollar.

American banks have received a nice Easter bunny from the FASB: the rules that relate to reporting losses and write-offs have been significantly eased. This will make their reports look much better. This has already fueled their stocks in the last few weeks, so traders are already expecting better results. But how good will they be? Maybe this FASB gift isn’t enough?

So, even if the huge corporations show good results, it’ll be hard for the stock market to rise again. Only extraordinary results will send the stocks up and the dollar down. We might see the dollar strengthening this week.