FX Buzz columnist Bruce Clark wrote on Thursday that the financial plague has come to the world's major stock markets, and this is not a good thing for the dollar. Like the US economy, the US dollar is in the top of the world, but as the European and Asian markets have fallen, the US stock market has shown signs of fatigue, reminding the world that even if the United States is the world's largest economy, it cannot be immune. In fact, a large part of the current financial turmoil is due to the reaction of emerging markets after the US dollar hit. The US dollar started its upward trend earlier this year, and the global reinflation strategy began to face pressure. The risk of the financial plague that first swept the weak countries during the summer and eventually spread to developed markets has always existed. This risk has now come true. The more anxious the US and global markets are, the more likely they are to influence the underlying power that supports the dollar's strength – interest rates.

Corporate profitability peaks

The fall in the major stock indexes this month marked a turning point, the threat of a strong dollar and trade war driven by the Fed tightening policy, and began to pay for the advanced economies. Some of these economies have been very vulnerable because of the imbalance in global economic growth. The recent pessimism has deeper reasons, not just kinetic energy that has hit the weak market. During the US bull market in 2016-2018, the two backbones were energy and finance, but now these two sectors have fallen sharply. Considering that they are the vane of the overall economy, the macro signals released by these fluctuations are clear and not optimistic.

Tuesday's industrial sector indicators – 3M and Caterpillar's earnings report further sparked a discussion of corporate profitability peaks, while also alerting the US economy and global growth. Both stocks fell to a new low in the year, after their earnings report alleged that the future outlook is uncertain because of weak performance in overseas markets and tariffs leading to rising costs.

If corporate finance is a window into the state of the economy, the answer is probably not ideal for the long-standing question of whether the US economy can maintain its growth advantage relative to other economies around the world. Investors who have already worried about the end of sustained economic expansion have to start ahead of the forecast for the end of the expansion cycle.

The dollar reaches its peak

More financial reports similar to Caterpillar and 3M will support the view that the tepid growth of the overseas economy is becoming a drag on the US economy. If so, it shows that the dollar that has risen in the past six months has completely digested the best news about the US economy and is vulnerable to signs such as growth and weaker corporate profits. The profit and loss balance inflation rate began to decline, which is an early sign of the danger of the dollar's earnings advantage. Then, the rate of return may reach its limit, pushing the dollar to outperform the main force of a series of currencies – the difference in yields may begin to narrow in various regions. The price trend in the foreign exchange market has given some inspiration: Generally speaking, the high beta coefficient currency, which is sensitive to the change of risk preference, strangely shows resilience, withstood the pressure of the current stock market, and stayed above the 2018 low. Moreover, although the US dollar long position has increased almost uninterrupted since April, the trend of the US dollar index has not progressed for several months. There aren't many traders who want to short the US dollar at the moment, especially considering that the Chinese renminbi is currently sitting on the edge of the cliff, plus major political risks in the UK and the EU. However, signs of a near-peak trend in the dollar are emerging.

Article from AETOS