Two trades could suffer if the U.S. dollar keeps climbing from its 2021 peak

Two trades could suffer if the U.S. dollar keeps climbing from its 2021 peak

September 30, 2021

The U.S. dollar's strength could spell trouble for a few trades, market analysts say.

The dollar index hit a one-year high versus rival currencies on Wednesday as investors embraced the possibility of the Federal Reserve starting to wind down some of its stimulus by the end of the year.

If the rally continues, some industrial stocks could be in trouble, Fundstrat Global Advisors' Mark Newton told CNBC's "Trading Nation" on Wednesday.

"A lot of these industrials tend to get much of their revenue from overseas," the firm's global head of technical strategy said.

For one, Caterpillar derives more than 60% of its sales from outside the United States, he said.

"As the dollar has really surged … industrials have been the weakest sector," falling more than 3.5% since the dollar's recent bottom on May 25, Newton said.

"My own technical projection suggests the dollar gets up near 95.35 between now and the middle part of October, so that could cause industrials to have a little bit more selling pressure over the next three to five weeks," he said.

The dollar index hovered above $94 in Wednesday afternoon trading.

Caterpillar's stock could become attractive if that plays out, Newton said.

Though it would be "a compelling buy" in the $173-$175 range, "it does look like it needs a little bit more on the downside and we're still in very much a weak seasonal time," he said.

Caterpillar shares ended trading Wednesday down more than 1% at $197.87.

"So, 173 to 175 is the first area, then 167," Newton said. "I do like buying dips for now. Trends remain negative and the dollar is still in a very persistent uptrend, so it's right to be a little bit patient."

Dollar dominance could also hurt another part of the market, Boris Schlossberg, managing director of FX strategy at BK Asset Management, said in the same interview.

"The biggest victim of this dollar rise is going to be gold," Schlossberg said.

"As real interest rate yields improve because nominal yields improve, that's going to put further downward pressure on gold," he warned. "Add to that the fact that I think gold is now seeing very, very strong competitive pressure from crypto."

That could keep a tight lid on prices, he said.

"I think gold goes below 1,700 and really disappoints a lot of the gold bulls," Schlossberg said.

Gold fell to around $1,725 on Wednesday.

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