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All Eyes on the U.S. Dollar Index

Posted by Larry Doyle on December 7, 2009 9:22 AM |

What’s leading the market both up and down?

Regular readers here at Sense on Cents are fully aware of my focus on the U.S. dollar as the primary driver of our markets over the course of the last half year. This past summer, the BRIC nations regularly railed on our greenback as the international reserve currency. Japan jumped on that bandwagon, as well.

The pressure on the greenback supported by the Fed’s easy money policy served as the fuel that launched our markets from the intermediate pullback experienced in early July.

Check out the patterns in the U.S. Dollar Index versus the movement in the S&P 500 since early July. These indexes are almost mirror images of each other. While the order of magnitude is not exact, the direction is very highly correlated.

I certainly believe this correlation will continue and rest assured active traders on Wall Street are watching this relationship closely as well. In fact, what happened overnight? Equity markets traded off as the U.S. Dollar Index continued to firm. Bloomberg highlights this point in writing, Yen, Dollar Rise on Rate Outlook; Stocks, Commodities Decline:

The yen strengthened and the dollar rose to its highest level in a month against the euro, as investors weighed whether the world economy is recovering fast enough to warrant higher central bank interest rates. U.S. stock index futures and commodities fell.

The yen advanced against all 16 most-traded currencies tracked by Bloomberg as of 11:42 a.m. in London. The dollar gained versus 15. The MSCI Emerging Markets Index dropped the most in six days, losing 0.7 percent. Dubai’s equity index plunged 5.8 percent to a four-month low. The Dow Jones Stoxx 600 Index of European companies sank 0.6 percent. Futures on the Standard & Poor’s 500 Index slipped 0.3 percent, while gold fell for a third day.

Federal Reserve Chairman Ben Bernanke speaks today for the first time since the Dec. 4 U.S. employment report signaled a surprise drop in the jobless rate, stoking expectations the Fed may raise rates sooner than economists had anticipated. Investors are concerned banks may have to increase writedowns that have reached $1.7 trillion worldwide since the credit crunch began, as Dubai World seeks to delay payment on $26 billion of debt.

What commodity has most benefited from the decline in the value of the dollar? Gold. How is that precious metal doing with the recent improvement in the greenback? Bloomberg highlights:

Gold for immediate delivery fell for a third day in London, slumping 1.6 percent to $1,142.97 an ounce. The metal reached a record $1,226.56 on Dec. 3.

While analysts and commentators may try to grab your attention and talk about economic fundamentals, if you are strictly interested in near term market movements, watch the U.S. Dollar Index like a hawk.


Related Sense on Cents Commentary:

Will Japan Take a Samurai to the U.S. Dollar?;  July 13, 2009

The U.S. Dollar Is Diving;  September 8, 2009

Dollar Carry Trade Drives Global Equity Markets;  September 16, 2009

Dollar Devaluation Is a Dangerous Game;  October 8, 2009

Dollar Carry Trade ‘Still’ Drives Global Equity Markets;  November 9, 2009

  • Bertrand de Frondeville

    Thank you for the insights. I wonder if the current dollar-stocks correlation reflects a change from previous history, so it may change again. I could agree that the (possibly new) current pattern may be lasting for a while, at least on the average through the usual volatility.

  • Larry Doyle

    Bertrand…My pleasure. There is no doubt that different factors and influences drive markets at different points in time. At this juncture, there is a very high correlation between the greenback and the equity and commodity markets. Why? I very much believe that the markets are dominated by the larger hedge funds, banks, and money managers. These institutions have this trade on and as a result, the prophesy becomes self-fulfilling.

    In time it may fade or lessen its correlation. I will be monitoring it very closely here at Sense on Cents.

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