With so many conflicting signals about markets, the US economy and abroad, China-U.S. trade war, and more, what is an investor to think about?
Throughout the noise, one measure is keeping an eye on. Even non-currency investors should be aware of the strength of the US dollar, according to a statement Monday. That's because while the strong dollar has many effects, the reason, at least right now, is that investors around the world are skating.
Normally, when the greenback becomes so strong, something yields, and other currencies begin to strengthen, observed Nicholas Colas, co-founder of DataTrek Research. If they don't, it means something is very different this time. And "different" in this case probably doesn't mean "good" when it comes to investor risk, "he said.
The currency target Colas prefers is called the trade-weighted US dollar index: wide, commodities, and it is floating around all the time ̵
The major contributors to the index are in the graphic above. And for some context, here's a chart showing the index's level throughout history:
The question of what, exactly, does it mean for a currency to "outperform" others is important, and anyone considering President Donald Trump's Twitter -Tirades about dollars have a sense of both its significance and its ambiguity.
Fact check: true. It makes more difficult for US companies exporting to remain profitable when the currency is higher. But focusing solely on manufacturers misses much of the larger context, as well as why things are so complicated right now for the dollar.
"Super-cap tech stocks – key market leaders for US stock markets – have the largest financial exposure to non-dollar revenues in any S&P group," noted Colas. "With 57% foreign revenue, Tech companies are facing strong headwinds right now." Other sectors with a higher than average exposure to the dollar include materials, consumer staples and energy.
Read: This ETF yields a small return in a falling interest rate world
Where else does a strong dollar create potential headaches? Federal Reserve.
That's because when interest rates are low elsewhere in the world, investors try to find places to get a low return. Of course, when more investors chase US bonds, the price goes up – and comes back. Depending on what kind of policy the central bank is trying to achieve, it may be headwinds or headwinds. But it is a mistake to assume that the Fed can do monetary policy in a vacuum.
As Colas notes, it is not just the trade war, and the corresponding 6% hit for the yuan, which keeps the dollar index so high. The euro, which holds the largest position in the index, is "11% lower from the high watermark in March 2018, back when the German 10-year bottom was given + 0.6% instead of the current -0.4%."  Related: How to play the ETFs trade war
Why would investors chase a -0.4% return when they could fetch 1.7% on the US 10-year bond
TMUBMUSD10Y, + 0.00%
It is a final component of what makes the dollar so strong, and it serves as a signal for how markets can behave in the coming months. As MarketWatch's Bill Watts explained at the end of September, the US dollar is the world's safe haven – even when the US is the one making global markets so uncertain, in part because of its dominance in the global payment system.
One of the reasons why European interest rates are so low, in other words, is that the US-China trade war is not just limited to the two countries.
"Risk version, negative European / Japanese interest rates, and trade war backlash are the trifecta of the reasons why the dollar sits on several sides," Colas concluded. "If we move from that story to something more positive in 2020, the dollar should soon begin to weaken. And if it doesn't, it's also an important sign."
: hang together or with certainty hang separately