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Dollar May Be Doomed: However ...

(A look at dollar, stocks, and gold correlations this morning)

MSCI World Equity Index (black) versus US $ Index (orange):

1)    No longer do we see the tick for tick correlation of stronger stocks, which represents risk appetite, and a weaker dollar.
2)    World stocks are making a new intermediate-term high and pushing up against the 61.8% retracement level (330.44) going back to pre-credit crunch highs.  
3)    If the real economy is about to rebound, will it compete with the financial economy for funds, i.e. suggesting this might be a decent resistance level for world stocks to stage a correction (maybe that is what the run up in bond yields is telling us).
 
[PDF Version with Charts]

US-Ten Year Government Note Yield (black) vs. US$ Index (orange) vs. Dow Industrials (blue)

1)    What is interesting about this chart to us: Assuming you had no biases (impossible, I know) and were told to look at this chart in isolation and draw a conclusion, we think this would be it:

•    The US dollar is led by rising 10-year interest rates AND a rising Dow Jones Industrial Average. 

That would be an interesting conclusion to draw considering we are conditioned to believe rising interest rates are bad for stocks (which an empirical review of history proves that canard wrong again and again) and over the last seven years or so conditioned to the idea that if stocks go up the dollar must go down, as discussed in the chart above.

2)    And back to the earlier hypothesis: If global growth in the real economy is underway, then it would not be a stretch to believe the rising trend interest rates will continue.  And if you peruse the chart below once again, you can see there has been a tight positive correlation of late between rising 10-year yields (i.e. lower bond prices) and the US dollar.
 
[PDF Version with Charts]

10-yr US Government Note Yield (black) vs. Dollar Index (orange) vs. Gold (blue bottom)

1)    As you can see by the rectangular boxes drawn, the momentum of gold’s beeline advance into the ozone started to decline when 10-year yields began to rise, i.e. keeping with the theme that:

a.    Rising yields compete against gold for funds, i.e. real asset and deposit opportunities
b.    Rising yields might reflect growth and a bit less risk in the global economy

2)    Despite how many have attempted to say the gold move is purely a reflection of the risk the US dollar will disappear somehow, the correlations show us this conclusion (fairy tale) is not being borne out.  When gold surged into new all-time high territory, the US dollar should have been spiraling downward into new all-time low territory.  In fact (assuming we wants some facts to get in the way of a fairy tale on occasion), the US dollar was rising as gold made a new high!  We don’t want to extend our conclusion too far here, but we would say the gold move reflected more concern about the eurozone and the single currency than the US dollar.  And just maybe the rising level on geopolitical tensions had something to do with it.  For the last time we checked, the US defense commitments extend into the Pacific evidenced by carriers and nuclear subs advancing into the Yellow Sea. 
 
 [PDF Version with Charts]