Back on January 30, I noted that the 12-week decline for the dollar was essentially unprecedented.

Generally speaking, a weaker dollar is bullish for risk assets and, relatedly, for global liquidity. And vice versa.

“[The] notion that the dollar will, at the least, refrain from staging the kind of rally that helped torpedo risk assets in 2022 is a key pillar of support for stocks,” I wrote, four weeks ago, before cautioning that “a stronger dollar and higher US real yields are kryptonite,” which was ominous because “one simple visual” suggested the greenback was “due for a bounce.”

An updated version of the visual I cited in that linked article shows the dollar did indeed bounce, starting pretty much immediately. In fact, it’s now positive (barely) on the same rolling window.

That inflection comes courtesy of the hawkish repricing across US rates, which itself is a function of hot US economic data and associated expectations for more aggressive Fed policy.

Note that the greenback is poised for its best month since September, when the “dollar wrecking ball” narrative was en vogue to describe the chaos unfolding across G10 FX amid the fallout from Jerome Powell’s terse Jackson Hole address and disconcerting US CPI data, which presaged a hawkish SEP.

It’s important to make the connection between the dollar’s precipitous drop from levels seen in and around that September crescendo and the “liquidity tsunami” narrative that many favor to explain stocks’ rebound from the October lows.

Apropos, buried half a dozen pages into the latest bearish missive from Morgan Stanley’s Mike Wilson was the following key passage:

More speculative stocks are beginning to underperform again. This suggests that the global liquidity picture may be starting to fade. The most obvious evidence in that regard relates to the US dollar strength. Dollar weakness accounted for over half of the global M2 increase we cited [last week]. Gold prices have collapsed too, which is often a good leading and coincident indicator of further US dollar strength. Of course, better economic data, higher interest rates and a more hawkish Fed are good fundamental reasons for this recent dollar strength to continue, or at least not turn into a tailwind for global liquidity. In fact, we would go as far as to say that this may be the key to short term stock prices, more than anything else.

There are a few counterpoints, one of which Wilson acknowledged explicitly. It’s possible that a BoJ pivot is imminent — that incoming governor Kazuo Ueda is set to embark on a normalization push sooner than many expect, although I’d note that his recent comments have generally been viewed as dovish. A pivot from the BoJ or an especially hawkish ECB, could lead to another pullback for the dollar, which would in turn be bullish for liquidity and stocks.

One way or another, Wilson said, “the US dollar and rates could determine the short-term path of stock prices, while earnings will ultimately tell us if this is a new bull market or a bull trap.”

Related: Stocks At ‘High Risk’ In March