Dollar surge leads to financial crisis, says analysts

Wall Street analyst said that similar performances by the currency have historically led to financial or economic crisis because of the unrelenting surge of the U.S. dollar, raising concerns over corporate earnings.

According to a Monday note, Morgan Stanley Chief Equity strategist Michael Wilson, one of the most vocal bears who predicted this year s stock market selloff, calculated that every 1% rise in the ICE U.S. Dollar Index has a negative 0.5% impact on S&P 500 earnings. He saw an approximate 10% increase in earnings growth in the fourth quarter.

The ICE US Dollar Index DXY, a gauge of the dollar's strength against a basket of rival currencies, rose 0.9% to 114.27 on Monday as the British pound GBPUSD fell to a record low against the dollar after the U.K. government announced it would implement tax cuts and investment incentives to boost growth. The DXY traded 22.4% higher on a year over year basis, according to Dow Jones Market Data.

The recent move in the U.S. dollar causes an untenable situation for risk assets that historically have ended in a financial or economic crisis, or both, according to strategists led by Wilson. The conditions are in place for one, which would help speed up the end to the bear market, although it is hard to predict such events. The analysts also predicted a year-end target for the dollar index of 118 with no relief in sight. Such an outcome is exactly how something does break, which leads to a major top for the U.S. dollar and maybe rates, according to strategists.

The Dow Jones Industrial Average DJIA extended its recent losses on Monday with the U.S. stock market on Monday, which is on track to finish the session in a bear market. The S&P 500 SPX plunged 0.6% to 3,673 after dipping below its June 16 closing low of 3,666. On Friday, 77 finished above that level. The Dow fell by 0.8%, while the Nasdaq COMP traded near the same.

The bear market in stocks is far from over until the large-cap index reaches the target range of 3,000 to 3,400 point-level later this fall or early next year, according to strategists.