In an interview with Yahoo Finance, Bond King Jeffrey Gundlach pointed out the movement of the dollar index. He thinks that the dollar rally could be another “real risk” for investors instead of the tech rally. Previously, Gundlach alerted investors about the tech rally.
Gundlach on the dollar movement
Jeffrey Gundlach said, “There’s a risk that the dollar starts to reverse into a significant downtrend because the value of the dollar versus other currencies is greatly affected by the growth in our budget and trade deficit.” The impact of COVID-19 pandemic on the overall economy could lead to a “fiscal explosion.” The outbreak could drive the dollar index towards a downward site. Gundlach thinks that investors underestimate this risk.
Dollar's impact on the economy
If there is a dollar crash in the near future, it might create a big threat to the U.S. financial dominance. The global slow down due to the COVID-19 pandemic has already hurt investor sentiment. The rising fiscal deficit across the globe is also an alarming sign for market participants. Global trade paused since the countries are not focusing on globalization. The policies taken by major countries to save human life and the economy look very strange.
Jeffrey Gundlach said that the U.S. “dwarfs the policies, particularly what the Federal Reserve is doing, versus the European Central Bank and other central banks. What we’re doing dwarfs who they’ve been up to. We’re really carrying the burden here in terms of the fiscal explosion. The dominance of the U.S. markets will start to fade away.” If Gundlach’s prediction becomes a reality in the near future, it could have a negative impact on investor sentiment. Investors need to provide potential weightage to this risk.
The S&P 500 Index has risen 41.5 percent since its low on March 18. Overall, the strong rally was due to major tech stocks including Facebook, Netflix, Alphabet, Amazon, and Apple. The Invesco DB US Dollar Index Bullish Fund has returned -0.5 percent on a year-to-date basis.