A change in US dollar action is driving markets. After trading sideways all year the buck has pushed higher for more than two weeks. The 3.6% rise, on the back of increasing inflation, is weighing on commodities, stalling bond bulls and making stocks in the higher growth Asia Pacific region more attractive.

The quarterly US corporate reporting is past half way. Sales growth of better than 9% is translating into impressive earnings growth just shy of 24%. However these historically high numbers are not helping US investors, and the S&P 500 index is down more than 2% since mid-April. Emerging inflation, rising interest rates and a stronger dollar is provoking an argument that earnings have peaked. If this is the cyclical high for company profits the outlook for US stocks dims considerably.

Commodities are sliding as the dollar rises. Gold is approaching the danger zone around $1300 and recent strong gains for base metals and energy markets reversed in overnight trading.

As US indices suffer European and Asian markets are outperforming, pointing to positive flows from international investors. The strengthening US dollar adds to the proposition as local currencies weaken, making them cheaper for global investors. Futures markets are pointing to small opening gains in Shanghai, Tokyo and Sydney, but today’s risk is outperformance, and the close may provide a positive surprise for local investors.

Australian investors face conflicting and seemingly contradictory moves. The finance sector lead the surprise rally yesterday despite clear indications of regulatory and structural change to come. While resource stocks are likely to drag the break through 6,000 yesterday points to further short term gains.