Is it worth trying to gauge the long-term trend in the U.S. dollar based on the trend in U.S. stocks?

There is a persistent belief among many forex traders that trends in various global markets have a profound influence on the trends in currencies.

The faith in inter-market correlations is strong because of the constant rumination of this idea in the financial press. Hardly a day goes by without somebody saying something like: “Higher oil prices sent the U.S. dollar down today, as rising energy costs are feared to slow down the U.S. economy.” Or, “The dollar gained today as a rally in the Dow restored investor confidence in the strength of the U.S. economy.”

That’s not to say that correlations between markets don’t exist. They do, but they are always temporary.

Still, at Elliott Wave International’s Message Board, readers often ask us to verify them. One question that comes up frequently is this: “When U.S. stocks decline, the U.S. dollar rallies, and vice versa. Is this correct?” When trying to answer a question like that, you could go a couple of routes:

1. You could consider the “fundamentals.” Why would the USD rally when U.S. stocks decline? Well, it could be because, “as the money flows out of the stock market, it goes into other dollar-denominated assets – i.e., Treasury bonds.”

2. Or – and this is a simpler way to answer this question – you could look at the chart of the Dollar Index and compare it to that of the DJIA, the U.S. benchmark stock index.

That could be eye-opening, because even a quick comparison proves the presumed negative correlation between U.S. stocks and the USD inconsistent:

In 1995-2000, the DJIA rallied. The USD rallied, too. (Positive correlation.)

In 2000-2002, the DJIA lost big – and so did the USD. (Positive correlation.)

In 2003-2004, the DJIA rallied. The USD lost. (Negative correlation.)

In 2005, the DJIA stayed flat. The USD rallied. (No correlation.)

In 2006, the DJIA rallied. The USD lost. (Negative correlation.)

In 2007, the DJIA gained. The USD lost big. (Negative correlation.)

In 2008, so far, the DJIA has been losing. So has the USD. (Positive correlation.)

Bottom line: Trying to gauge the long-term trend in the USD based on the trend in U.S. stocks doesn’t yield consistent results.

Click here to View this Urgent (June 18) Video Forecast for the USD posted right now inside EWI’s Currency Specialty Service. Editor Jim Martens tells subscribers, “the moment has come for the U.S dollar” to make a strong move.

Good day and good forex trading!

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