SHORT-TERM RATES AND THE DOLLAR

While there has been a negative correlation between the Dollar and stocks this year, there has been a positive correlation between the Dollar and short-term interest rates. The chart below shows the US Dollar Index ($USD) with the 1-Year Treasury Yield ($UST1Y). Both rose in January-February and then declined from March to October. Notice that stocks declined when these two rose and advanced when these two declined. While correlation is not the same as causation, there is clearly some sort of connection here. Therefore, we should be watching short-term rates for clues on the Dollar. A rise in short-term rates would be positive for the Dollar. Should the negative correlation between stocks and the Dollar hold, a rise in the Dollar would be negative for stocks. Right now, however, both short-term rates and the Dollar remain in clear downtrends, which is currently positive for stocks.

Click this chart for details.