U.S. Dollar Likely to Remain Linked Inversely to Stocks

In currency trading, dollar has been down when equities are up

For the most part, over the last year or so, the U.S. dollar has been moving inversely to U.S. stocks. As stocks fall, the dollar rises as investors use it for a safe haven. Conversely, as equities rise, the dollar has been falling. GFT’s Kathy Lien points this out in FX360:

Over the past year, when U.S. equities rise, the dollar tends to fall because the improvement in risk appetite eases safe haven flows that have been parked in the U.S. dollar. When 3 month LIBOR rates in U.S. fell below Japanese levels, the correlation between equities and currencies exacerbated as the dollar became the funding vehicle of choice for investors looking to assume risk.

The notable exception was yesterday. Even as U.S. equities surged higher, the dollar made gains in forex trading. However, this is likely an aberration due to the fact that ECB president Jean-Claude Trichet is talking up the importance of a strong dollar.

While the dollar and U.S. stocks may start moving in tandem again, it will take better proof that the U.S. economy is on strong footing for that to happen.