Dollar Looms as ‘Weak Link’ for U.S. Stock Rally: Chart of Day

May 15 (Bloomberg) -- U.S. stocks are poised to lag behind European and Asian shares because the dollar is a “weak link,” according to Jason Todd, a strategist at Morgan Stanley.

As the CHART OF THE DAY shows, the Dollar Index slid in the past two months as the Standard & Poor’s 500 Index and the MSCI EAFE Index, a benchmark for non-U.S. markets, both surged. The currency gauge tracks the dollar’s value against the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

The dollar’s inability to follow the lead of share prices and move higher in anticipation of an economic recovery is “a notable inconsistency,” Todd wrote in a report yesterday.

While the S&P 500 tends to rise when the dollar drops, it usually fails to keep pace with EAFE, the report said. The U.S. index trailed in five of six time periods between 1981 and 2007, according to his research. EAFE soared about five times as much in dollar terms during a seventh period, from 1985 to 1988.

Todd also suggested that the dollar’s slump may enable energy, technology and industrial companies dependent on the global economy to outperform financial and so-called consumer discretionary companies that rely on local markets. Financials may lose their place as U.S. market leaders, he added.

“These trends may not play out immediately,” he wrote. European companies are worse off fundamentally than their U.S. peers, and financials are benefiting from increased lending profits and a capital-market revival, he added.