Hi Everyone,

There has been an interesting correlation between the stock market and the dollar value since the markets hit their lows in March.  Whenever the stock market goes up, the dollar goes down.  Now this is not perfectly correlated, as the stock market has gained about 50% during that period, and the dollar is down about 15%.  Nevertheless, it has been an almost perfect inverse correlation.

We had seen this before with commodities, but not with the stock market.  What are reason for that?  The burning of the dollar is related to two issues.  One being the actions of our government with the ultra low interest rates, the printing of the money that worries our creditors.  As the dollar is still a last refuge during crisis as we saw a year ago, the market perceives the risks being lower and therefore money moves to different areas. This correlation will likely not last, but it is here for now.

I don’t think the market conditions are not going to continue, as I think the markets are way overvalued and once realization sets in that the current economic reality is much less rosy than perceived, the stock market will move down.  This will likely put a floor in for the dollar.  I also believe that other governments, especially in the EU and Japan, will not allow a further dollar depreciation, as it will kill any recovery in their export oriented economies.  The dollar likely has further to drop against some Asian currencies.

If you have gains in the stock market from the rally of the past six months, consider taking some gains off the table, assuming it matches your personal circumstances.

As always, please feel free to comment.

Cheers,

Patrick