If the Dow goes up, would EUR/USD goes up or goes down ?
its important to understand that its not a 100% correlation.
But generally when the stock market goes up the eurusd goes up.
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Fundamentally why ? Doesn’t currency supposed to reflect the strength of an economy like the stock market ? So if DJ goes up US dollar should also goes up so why EUR/USD would go up instead of down ?
The (overly simplified) idea is that when the stock market goes up people who have been keeping their money on the sidelines in USD (as it’s seen as a safe haven currency) are now selling their USD to invest their money in more riskier assets which may be EUR, GBP, etc. More people want to sell USD and buy EUR and as a result EUR strengthens vs. USD.
There’s also the fact that USD is currently very cheap to borrow so it can act as a funding currency i.e. when the stock market goes up people borrow USD to invest in riskier assets and / or currencies in other markets which may offer a greater return on interest e.g. AUD/USD carry trade. They may then sell USD to buy these riskier assets. Though the Yen is probably more popular for funding given it’s ridiculously low interest rates (0.1% I think).
There’s a ton of other factors which is what makes the whole thing not entirely predictable. How strong the correlation between the DJ and EUR/USD is will move around depending on how the economic recovery goes. Nothing ever stays the same for long.
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Thanks for that explanation will think about it.