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I would be cautious of using the dollar index like this. There are quite a few similar indices you can use; the CRb as I mentioned, the 10yr yield, smallc caps vs. mid caps, the VIX, STIR rates and forward curves, you can go on and on.
the point is that nothing lasts forever. You can have instances when equities and the dollar will go in the same direction, and instances when they dont. It all depends on the reasons behind the move.
I'm not really sure what you're saying? What I mean to be saying is that relationships like this (i.e. dollar up stocks up, or, say, bonds down stocks up, or whatever) are great but only as long as they are appropriate. What's important I think is to have a handle on what the themes are in the market at the time. There are countless examples when X going up meant that Y was going up too, until the environment changed and X and Y moved in opposite directions.
Some examples of how I use this
* I trade out of london, and often the first things I look at are the currencies - say the flavour of the month is chinese growth, the aussie has the chance to go bid before the mining stocks do - or, the euro has a chance to fall before the bank stocks do. When there is a theme like this, it's OK to be looking at other asset classes to get a handle on the sentiment, provided you are looking at the right things. Or peripheral bond spreads, or whatever.
* another example would be crude. when it was trading in the 120s and 130s, Oil and Equities had a negative relationship. as crude went higher, stocks would dip on rising costs and lower revenues. Fast forward a coule of years, and crude would rise as stocks would rise, on increased risk appetite and optimisim about the US economy recovering.
Look, all I'm saying is dont get married to an "X does this, Y does that" approach. At some point it will bite you in the ass.
I completely agree! The correlation between dollar weakness and risk assets is something that works only as a direct consequence of Fed policies. The market is rigged, so we need to understand HOW it is rigged.
These lockstep correlations are really pretty new. It seems that everything is correlated. That's why so many hedge funds following neutral methodologies have gone out of business. For an example of how ridiculous this has become, it's now helps to watch the NYSE TICK to trade the CL crude oil futures. When/if there is ever a return to normally functioning markets, these nutty correlations will disappear.
sorry but I disagree that this happens solely because of a FED policy though (I mean, that might be true now, but not all the time across all realtionships). What I mean is sometimes the FED isn't "rigging" the market, but these relationships still exist.