The Dollar Is Driving Financial Markets

We’ve got this very unstable situation in which Fed policy is dictating the behavior of so many assets. The dollar is at the nexus of this.

- Dean Curnutt, President, Macro Risk Advisors, quoted in “Dollar Calls the Tune For Stocks, Bonds, Oil”, Tom Lauricella, The Wall Street Journal, November 2, C1

Crucial Wall Street Journal article Monday morning showing the incredible correlation between the dollar and financial markets in the last couple of months. The chart in the print edition isn’t available online which is disappointing because I wanted to post it.

The relationship is incredible. The inverse correlation between the dollar and the S&P 500 was 71% in October. That is, when one moves up, the other moves down. In contrast, between January 2007 and July 31 of this year, the correlation was 2% - no correlation.

The dollar is similarly, though not as strongly, correlated with the VIX, credit spreads, gold, emerging market spreads and oil over the last two months.

Comments

[Roger Knights:]

Here's a link to an Oct. 18 SA article by David Goldman, "How to Determine in What to Invest," that shows a staggering year-to-date correlation between the S&P & the trade-weighted dollar:
seekingalpha.com/artic...

Nov 03 05:47 AM

[Old Trader:]

If an investor is to be successful, at least in the near(er) term, he/she is going have to "go to school" on FX, since, as the article points out, it impacts the market so much.

Nov 03 10:31 AM

[ryanclarke:]

The dollar won't be driving the financial markets much longer. For cnbc watchers go to the symbol box at cnbc.com and type "us@dx" to get the dollar index relative to other currencies. For how this "weak dollar" policy is causing imports to collapse and why imports decreasing in the United States see www.eia.doe.gov/pub/oi... and pay attention to lines Net Product Imports (5)
Gross Product Imports (5) Product Exports (5) . GASOLINE IMPORTS INTO THE U.S. ARE FALLING OFF A CLIFF!

Nov 03 03:12 PM

[Albertarocks:]

This inverse relationship is even more glaring than most people recognize. At one time, prior to 2000, when the American dollar rose in value it was because the economy was truly strong. So at that time, when the dollar gained in strength, the stock market rose in well deserved celebration because, well... the economy was truly strong.

But somewhere along the way that all changed, and the relationship between the dollar an the stock markets (not only markets but commodities) went from moving in tandem to moving in "inverse lock-step". I've put together this chart that I'm happy to share which demonstrates this relationship and what it means. I've posted this chart a few times on SA, so if you've seen it before, I apologize...I don't mean to overdo it. But it's such a very telling graphic, that those who haven't yet seen this.... you just gotta see it.

stockcharts.com/h-sc/u...

I propose that what this chart is showing is that the end of this current economic cycle occurred in 2000, rather than in 2007 as is the accepted assumption. The transition from the "tandem" relationship between the dollar and "real things" to the "inverse" relationship began in 2003, rather loosely at first, and became firmly locked in 2006. Since then, when the dollar moves up, darned near everything else moves down and vice versa. It has become such a firm relationship in the past year or two, that the FED is now kind of stuck between a rock and a hard place. If they do anything at all to strengthen the dollar, the markets could (will) fall heavily and any form of recovery in the economy could be hindered. If they don't, inflation will eventually spiral out of control. It's eventually going to anyway, but that's a discussion for some other time.

So as the chart shows, the FED is damned if they do and damned if they don't. They're going to be damned either way, which is only fitting. They sealed that fate for themselves decades ago.

What this chart isn't showing yet, but I can darned near smell it coming, is that the dollar and the stock markets may well once again return to the "tandem" relationship, which for most of history has been the case. Only this time, I fear both will be falling at the same time. I can't see that happening in the immediate future, but a little further out, I'd argue that it's likely. I'm no economist, but if I'm not mistaken, that's a recipe for stagflation.

Nov 03 11:24 PM