The rallying dollar has eased inflation worries, boosting stock prices. Since mid-July, the currency's gain has pushed down prices for oil...

Share story

The rallying dollar has eased inflation worries, boosting stock prices.

Since mid-July, the currency’s gain has pushed down prices for oil, gold and other commodities priced in dollars, as they became more expensive for foreign investors.

Since the euro hit a record high of $1.6038 July 15, it has dipped below $1.50. During that period, the greenback gained 5.5 percent against a basket of six currencies including the euro, while the Standard & Poor’s 500 stock index gained 6.7 percent and oil lost more than 17 percent.

The dollar could be poised to rally further. Investors are betting slowing economic conditions could prompt the European Central Bank (ECB) to cut interest rates to spur the region’s growth. But lower interest rates can undermine a currency. Even if U.S. rates remain steady, lower European rates could give the dollar a boost.

Bob Doll, BlackRock’s global chief investment officer for equities, thinks the ECB might begin easing by mid-2009.

A weak dollar has juiced profit for U.S. companies with big foreign sales. This streak could end if the dollar keeps climbing, but in general, U.S. stocks are well-positioned, Doll writes.

“While a stronger dollar would detract from overseas earnings by U.S. companies, it would reflect a shift in economic growth patterns whereby global growth would be slowing faster than U.S. growth,” he adds.

Last week, the Federal Reserve held its benchmark interest rate steady at 2 percent, but Credit Suisse Foreign Exchange Strategist Ray Farris says investors expect the central bank to raise rates later this year.

Farris isn’t convinced the Fed will do that, as growth remains sluggish, but he notes higher U.S. rates would give the dollar more room to rise.