Comments on: Looking into the Dollar / Equities Relationship http://systematicrelativestrength.com/2009/11/20/looking-into-the-dollar-equity-relationship/ The Official Blog of Dorsey Wright Money Management Wed, 08 Feb 2012 08:40:00 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: A Non E. Mouse http://systematicrelativestrength.com/2009/11/20/looking-into-the-dollar-equity-relationship/#comment-340 A Non E. Mouse Sat, 21 Nov 2009 18:36:24 +0000 http://systematicrelativestrength.com/?p=1157#comment-340 "David Brown at Seeking Alpha" suffered an all-to-common serious disconnect, when he argued that the recent "inverse relationship between the dollar and the market is not that surprising since a weak dollar means more exports and fewer imports for the U.S. and higher material prices." His disconnect? The U.S. dollar index is a FUTURES CONTRACT. It is NOT trade-weighted. The USDX might actually have been trade-weighted 20 or 30 years ago, but it isn't no. For fun - I say for fun, because I know it won't mean anything for your trading process - you might compare the list of currencies and weights for the trade-weighted index found at the Federal Reserve's research site to the currencies and weights for the USDX. I agree totally about the nature of the correlations involved. It should be pointed out that correlation doesn't imply causality. When a correlation changes over time, reversing, etc., it's possible that either the correlations observed were spurious, or that a third, "confounding variable," was actually the causal factor, and both the dollar and the stock market responded to that third variable. Either way, that would imply that paying a great deal of attention to the dollar/stock relationship would be relatively fruitless. “David Brown at Seeking Alpha” suffered an all-to-common serious disconnect, when he argued that the recent “inverse relationship between the dollar and the market is not that surprising since a weak dollar means more exports and fewer imports for the U.S. and higher material prices.”

His disconnect? The U.S. dollar index is a FUTURES CONTRACT. It is NOT trade-weighted. The USDX might actually have been trade-weighted 20 or 30 years ago, but it isn’t no.

For fun – I say for fun, because I know it won’t mean anything for your trading process – you might compare the list of currencies and weights for the trade-weighted index found at the Federal Reserve’s research site to the currencies and weights for the USDX.

I agree totally about the nature of the correlations involved. It should be pointed out that correlation doesn’t imply causality. When a correlation changes over time, reversing, etc., it’s possible that either the correlations observed were spurious, or that a third, “confounding variable,” was actually the causal factor, and both the dollar and the stock market responded to that third variable. Either way, that would imply that paying a great deal of attention to the dollar/stock relationship would be relatively fruitless.

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