The State of the Dollar’s Correlation

One of the things that's gotten a fair bit of chatter in the press of late has been the idea of a de-coupling between US markets and those in Europe. It is suggested that traders and market participants are taking a comparative look at the two economies and seeing better opportunities in the US, which is leading to better performance for US stocks and also for the dollar. Let's take a look at the numbers to see how that's really playing out.

The chart below looks at the correlations between the USD Index and the S&P 500 (red), US 10yr Note yields (green), Oil (purple), and Gold (yellow). The correlation figures are based on a 20-period look-back calculation using daily closing data.

Dollar correlation



What immediately jumps out is that the dollar has become much more positively correlated to all of these major markets in the last several weeks. In the case of the stock and bond markets, this has been developing since mid-November, meaning the commentators talking about this stuff recently have actually be rather late to the game, which is often the case.

Interestingly, just as stocks and bonds were shifting toward more positive correlations in mid-November, the commodities were moving toward more negative ones. They have obviously since turned that around again, very sharply in the case of gold since the start of the new year.

Be aware, though, that there's a difference between "more positively correlated" and being actually positively correlated. In all these cases we're talking about markets having gone from very negatively correlated (the closer you get to -1 the more directly opposite the two markets tend to move). At this point these markets have only reached near the 0 correlation level, meaning the markets haven't really been trading in unison at all of late.

The move in the S&P 500's correlation to the USD Index is the most interesting in that we're seeing the most positive reading we've seen since June of last year. What makes this really interesting is that in the past the higher correlations between the two markets have come when the dollar was falling. The last time the two markets were positively correlated during a USD rally was during the latter part of 2009 and early 2010.

USD correlation



Notice how there was a kind of choppy positive correlation between the two markets (S&P 500 in green) during December 2009 that broke down in January before things turned back again in February. Now consider that we've got a choppy kind of positive correlation between the two markets working now. Could be we're setting up for some kind of repeat performance.


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One thought on “The State of the Dollar’s Correlation

  1. avatar


    It’s really a decoupling of Europe versus the other major markets. If you look at currencies you’ll see that the Euro has decoupled strongly from the other majors (specifically the higher yielding ones as it tends to drag the GBP with it) and sentiment is of cause extremely negative as per COT readings.

    Thus, as the Euro is the single biggest contributor to the USDx you see the normal high negative correlation between US Stocks and USDx decline – all because of the extreme negative sentiment towards Europe and thus the Euro. Hence at the moment the USDx is not a great indicator of broad USD moves against the majors it’s more of an indicator of Euro strength/weakness – just take a look at EUR versus CAD,NZD,AUD and how these three have fared against the USD with rising stocks this week – they’ve behaved exactly as you would expect – again this highlights the Euro weakness is the cause of the lower negative correlation of the USDx


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