Friday, March 15, 2013

The dollar and US equities

The correlation between US equities and the dollar has started to turn positive after an extended period of being negative. The usual relationship, pasot-crisis, has been for the dollar to rise when there was risk-off in the market. The risk-off environment will lead to a decline in US equities which will create the negative relationship. There have been short periods of exception to this rule: early 2008, spring of 2010, summer 2011, and first quarter 2012. But we have not had a strong dollar equity positive relationship since mid  2001 to 2003 when equities were rallying and the US economy was responding to fed easing. Seems similar to today?

It seems as though the dollar is not being used as funding currency and US investors have been avoiding foreign stocks. US investors have a preference for US risk assets and foreign investors are also feeling better about the US which translate to dollar demand from foreigners and less selling of dollars by US investors. This is consistent with a US recovery leading the world and risk-takers wanting to hold dollar assets.

No comments: