Dollar Tech

I have found the correlation of a rising U.S. dollar index to that of a falling stock market to be of particular interest to me this year. Shown in the chart below, each rising leg in the U.S. dollar index corresponded to a weak period for the S&P 500. I find it fascinating that such a strong correlation exists. That’s a relationship that can be monitored and evaluated using technical analysis.

Background

In a normal economic environment, we’d expect a rising U.S. dollar to weigh on commodity prices, which in turn would stimulate wider profit margins and higher stock prices. However, these aren’t normal economic times. The Credit crisis in 2008 has now turned into a Sovereign Debt crisis in 2010 in which levered economies are reaping what they’ve sown after years of deficit spending. Debt service burdens have widened as bond investors require a higher interest rate for the risk. In these periods of heightened concern over sovereign debt, money leaves the euro and enters into the U.S. dollar in search of safety and liquidity, ironically, despite our own lofty debt levels. (more)