Is The Dollar The Key?

Since late summer, we’ve seen a tremendous rise in the dollar (see picture below).  The dollar index has risen from 71 in mid July and peaked at 88 on November 21st.  November 21st.  November 21st.  Oh yeah.  I thought that rung a bell.  That was the day the stock market bottomed (at least for now).  So, is it that easy?  Dollar down, stock market up?  I don’t think so.

 Dollar Index


But, the dollar may have more to do with the direction or the market than you think.  It’s a trickle effect.  The dollar moves inversely with commodities, the global growth stocks, and companies based here but their sales come from abroad.  In addition, as you can see from the chart below, when the Euro strengthens against the Yen (blue line), the S&P (green line) does very well (see below).  This is a very high correlation.  And the Euro has been on fire in the last few days.

Euro/Yen vs S&P 500

We’re seeing two things right now.  For the first time in a long time, the dollar is weakening and this is happening at the same time that there really aren’t a heavy amount of sellers of equities.  We’re drifting down after being overbought but nothing serious.  I think it’s ok to buy a few things in here that will benefit from a further weakening dollar.  We did stall out at the 50-day moving average but as one reader pointed out on the comments yesterday, when the market walks along underneath some moving average, it’s only a matter of time before it breaks above it.  That may come soon.

2 Responses to “Is The Dollar The Key?”

  1. 1 Hedge Fund of One December 15, 2008 at 3:37 pm

    As I recall, there was a time when yen carry of USD to yen had a correlation with U.S. stock market. With the Euro/Yen at high correlation to S&P500, do you think that the “yen carry trade” has moved to Europe and that maybe the Europeans are contributing to the current bear market rally?

    • 2 keggerss December 15, 2008 at 3:59 pm

      I think that’s a good observation. There are a ton of factors. The main one now is the dollar is the lowest yielding currency in the world and the Euro is the highest yielding currency. Very interesting though to watch the reversal in the dollar and all that goes with that.

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