The HS Dent Financial Blog

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Must the Dollar Fall if Stocks Rise?

You know the drill: stocks up, dollar down.  With investors rediscovering their appetite for risk, the dollar has lost its appeal as a safe haven and has resumed the downtrend it was in long before the financial crisis.  So, a falling dollar only makes sense with a rising stock market.  Or does it?

Check out the chart below, sent to us by Douglas Robinson at RCM Robinson Capital Management LLC.   As you can see, for the past two years, the dollar and the S&P 500 have had a strong negative correlation.   But it wasn’t always that way.

As you can see from the green areas of the chart, there have been several times in recent years in which the dollar and S&P 500 rose and fell in near lockstep.  And if you go back to the 1990s, you’ll see that while US stocks were in a bona fide bubble, the dollar was near all-time highs!

Bottom line: don’t expect the current negative correlation to last forever.  There are limits to how low the dollar can go before it starts to damage the US financial system and stock prices.  We won’t attempt to call a bottom here.  Forecasting currencies is the quickest way to an ulcer or an early heart attack.  But we can say with a fair degree of confidence that we expect the US dollar to be significantly higher against most world currencies a year from now.

And one final note: for all of those rabid dollar bears and gold bugs who are convinced that the dollar and its guardian — the Federal Reserve — are uniquely rotten, consider this: when the world financial system plunged into meltdown in 2008, investors ran to the US dollar, not away from it.  All of the investors — including the world’s central banks — who are currently piling into gold and sending it to new highs should keep that in mind.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy