Thursday, December 17, 2009

Stocks and the U.S. Dollar: A Shifting Relationship

Note the close correlation of the two charts (ES futures, top; euro vs USD, bottom) over the first three-quarters of the period since September. During December, however, the relationship has fallen apart, as we've seen a dramatic correction in the euro, while stocks have held within their multi-week range. Investors are banking on a growing U.S. economy, but they are not banking on significant inflation or on an imminent hike in interest rates. That is creating a sweet spot, where both stocks and USD benefit from favorable economic news.