It's been a very encouraging two weeks for the market. Stocks rallied eight days straight to recover August losses, there's been good breadth, and the relationship between stocks and bonds seems to have normalized, with better data leading to higher yields and higher equities. The major thorn I see in this overall rosy environment is the steep drop in the U.S. dollar.

It's a very common refrain among the most bullish investors that a lower dollar is the key ingredient for a big bull run. That's more of a meme propagated by gold and bitcoin bugs who think there's a lifelong inflation conspiracy rather than a real fundamental truth. The dollar has steadily strengthened next to its peers since the Great Financial Crisis, and generally represents U.S. dominance on the global stage, which is the most foundational of all the bull cases.

Right now, the situation is that the U.S. may be losing its edge on the rest of the world. We've been the stalwart economy of the post-Covid era and were the first to recover from the pandemic after pioneering the vaccines. Sure, inflation spiked, and the dollar did too as the Fed hiked rates, but 2021 saw a huge rise in both the value of the dollar and stocks, too. Since the pandemic, the dollar is up, and stocks have obviously done great.

Now, the dollar's getting shredded. Especially in the context of the past few weeks, a big dollar decline isn’t obviously bullish.

The whole reason stocks ramped back so hard the past two weeks is that economic data beat expectations and provided relief to the deep concern that arose from a bad July payrolls report. Treasury yields bottomed alongside the S&P 500, and that was a key development that showed bulls should prefer strong economic data over lower interest rates. But now with the dollar making lows, the reasoning for the bounce-back looks suspect. Yields and the dollar have been connected at the hip for the past three years, which means the latest slide in the dollar is likely to be accompanied by a fresh new low in yields.

If yields follow the dollar down, it's not likely to be for good reason, which means stocks would likely come back under pressure. In other words, celebrating a lower dollar at this point is falling back into the fallacy that bad data will be good for stocks, which at this point almost certainly isn't the case. 

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