The Weakening Correlation between the USD and the Stock Market

Throughout most of the credit-crisis, the value of the U.S. dollar and the U.S. stock market had a very strong, negative correlation. When the U.S. stock market went down (up), investors would flee to the safe-haven greenback and the value of the USD would rise (fall). This correlation became extremely tight with each passing day, but recent Fed announcements and better-than-expected improvement in the U.S. economy have unraveled the strength of the correlation.

The unraveling began with the unemployment rate dropping from 10.2% to 10.0%, which spooked the markets into thinking that the Fed may raise rates sooner than expected. The dollar appreciated considerably, while the stock market was up slightly on the news. I expect this unraveling to continue and a shift of focus to take place, from the FOREX market focusing on the movement of the stock market to the FOREX market focusing on when and by how much interest rates will change. Perceptions of changes in rates have always moved the FOREX markets, but because interest rates have been zero for so long, investors started to focus on stock market movements. As noted above, I speculate the correlation between USD and stocks will break down.