Currencies are certainly an important part of the global financial machine. The purchasing power and export costs of an individual country or region are based on the relative value of their currency — and this makes a great impact on standard of living, GDP and other factors.
I've long been a proponent of the benefit of having a strong currency, in whatever country you live in. In our case, it is the US Dollar. While some say that a weaker Dollar allows for our manufacturers to produce cheaper exports (thus boosting our economy and job situation) — in general the benefits of a strong currency far outweigh the alternative, in my view.
A strong currency allows consumers to have a higher standard of living on a relative basis than citizens of other countries … imported products are relatively cheaper. It also certainly makes traveling overseas cheaper as well. And as an indication of the general fiscal state and from a psychological perspective, a strong currency is a good thing.
And don't forget that strong currencies are where "flight to quality" money goes to park itself. Imagine if the Dollar & US Treasuries completely lost their place as a world pre-eminent safety zone … because currently the money that is parked there often goes right into the US stock markets when the times comes to re-allocate. That's not likely to happen soon, however.
That aside, there really is no definitive long-term correlation between the Dollar and other risk assets like Stocks, Gold, Bonds & Oil. Despite what some 'experts' would like you to think. There have been shorter-term correlations throughout history, but they have varied both in strength and duration.
As an example, during periods of a strong Dollar in the 1980s and 1990s both our economy and stock markets were very strong – Bonds also rallied during those times (interest rates dropped). Meanwhile during those periods Oil & Gold were relatively weak. Some of those correlations have reversed or slowed since that time period.
Nonetheless, let's take a look at the current scenario vis-a-vis the Dollar and other assets. Recently the Dollar has shown some strength, mostly due to weakness and uncertainty about the Euro currency (FXE). On an interesting side note, despite the recent Euro weakness, it still is about $1.30/1 Euro — while when the Euro was founded in the late 1990s it was anticipated (and traded in) that it would largely be in the range of $0.80 to $1.20 — somewhat 'pinned' around $1.00/1 Euro
We'll be using UUP ETF (green) for the Dollar, SPY (red) for US Stocks, TLT (blue) for US Treasuries, USO (gray) for Crude Oil, and GLD (yellow) for Gold.
The first chart below is SPY vs UUP performance since UUP basically topped in late 2008 — this also was one of the key market bottoms, although it famously reached a lower panic low in March 2009. Note that the rebound in stocks we've seen since that time has been accompanied by a generally lower trending Dollar. This has provided a backdrop for higher stock prices it appears, so keep an eye if the rising UUP breaks above its long-term trendline.
SPY vs UUP Long-Term Chart
SPY vs UUP Short-Term Chart
The shorter-term UUP vs SPY daily chart above shows the strength in the Dollar since late-August. Note that there really hasn't been a correlation here with the SPYders … as we mentioned, these inter-relationships between different assets aren't set in stone rules.
Next below is the Crude Oil vs Dollar chart — again here we see that UUP has been rallying, but in general there hasn't been a strong correlation or affect from that move on USO prices. Some say that a rising Dollar makes Crude Oil prices rise, but once again this is not a "permanent" relationship.
USO vs UUP Short-Term Chart
We do see much more of a correlation when we look at the long-term Treasury Bond ETF (TLT) and the Dollar ETF (UUP), see the chart below. Both of these have rallied very closely in tandem during the time frame examined. This is somewhat logical as these are often "safety assets" where cash is parked on the sidelines. Also take note that TLT has outperformed UUP along the way.
TLT vs UUP Short-Term Chart
Finally we examine Gold ETF(GLD) versus Dollar ETF (UUP), below. Here we do see what looks like an inverse correlation. The strength in UUP does look to be hindering the performance of GLD. This relationship does have some historical backing, as some believe that money shifts between hard money assets like gold into soft paper money assets like currency.
GLD vs UUP Short-Term Chart
Bottom line is the Dollar in the form of ETF UUP has been showing some strength recently, mostly at the expense of the Euro (FXE ETF). But long-term, the Dollar is still relatively weak and is approaching a long-term trendline that could possibly provide resistance. Certainly news events out of Europe, Asia and economic developments here will have a big impact on 2012 Dollar performance.
Secondly, keep an eye on the correlations between the Dollar and major assets like Stocks, Bonds, Oil & Gold – but remember that none of these relationships are permanent in and of themselves. Currently we do see a short-term positive correlation between Bonds & Dollar and a short-term inverse one between Dollar & Gold. Longer-term, there may be an inverse relationship between Dollar & Stocks that bears watching, but that's not certain.
