US Dollar goes up when stock market does bad, but also when it does good?

ferchorduy · February 16, 2021, 8:04pm

Hello. I’m new to the forex field, and I am a freshman studying finance. I really want to understand everything clearly, and I’m having an issue with what affects the USD.

For example, on the lesson " How Bond Yields Affect Currency Movements", they say that if the stock market seems risky (meaning it might drop), more investors steer away from stocks, and buy bonds and the safe-haven US Dollar, therefore raising the the price of the USD higher.

However, in the lesson " The Relationship Between Stocks and Forex", they say that a stronger stock market mans a stronger economy, which means more investment in the country and currency, which means a stronger USD.

Am I missing something? Doesn’t this mean that the USD will increase in both cases, a bad economy or good one, since demand for the USD increases in both cases?

So what are the true fundamental indicators that tell me to buy EUR/USD? Or can someone please explain how this works or if I’m missing something? Thanks.

FOREXunlimited · February 16, 2021, 8:22pm

US Dollar goes up when stock market does bad, but also when it does good?

If we could reduce “market action” into one sentence, we’d all be millionaires. Don’t think about trading from a scientific perspective b/c it is not science (e.g. it’s not that black and white)- it is in it’s own category.

tommor · February 17, 2021, 10:08am

Your question is absolutely justified - how can the same factor cause opposite results?

In fact, you can demonstrate that the US stock market:USD relationship is weak at best. Look at the Dow sine the Euro’s inception in 1995 and compare it to the charts of the EUR/USD and USD/JPY over the same period.

Your position and approach are not what we often see on babypips. Please post more on your observations as your studies progress.

Gregoski · February 17, 2021, 11:14am

Brilliant question, I was trying to search for the answer to that too. I have come across this article in the school of pipsology
https://www.babypips.com/learn/forex/the-dollar-smile-theory
It still doesn’t make much sense to me as I’m new to this game, however it does make me think.
I use DXY index with all my UDS trades, I know it is just an index and EUR/USD makes the larger part of it but since looking at it when planning my trades it often saves me from being on completely wrong side of the equilibrium.

ponponwei · February 17, 2021, 6:29pm

I just re-read the lesson and I think even there it looks like even they’re not sure lol. They cited this chart which doesn’t seem to have any consistent correlation…

Gregoski · February 18, 2021, 9:53am

Good graph, but I still won’t be able to make trading decisions out of this. On pipsology lesson I do get the explanation of domestic and international influences on UDS. In my trading I found that there are factors I will never understand so trying to keep it simple. DXY index is my favourite and most reliable source of info how is USD doing at present time. For example there is high negative correlation between GBP/USD and DXY index. It just helps to stay be on the right side of the trend.

pezza55 · February 19, 2021, 6:37pm

Yeah i find the DXY better to find the USD moves and levels. i have seen people say stocks down dollar up but never looked at this as confluence.

FOREXunlimited · February 20, 2021, 1:38pm

How is it the “most reliable source”? USD is traded against a plethora of currencies, so, everything is relative.

Gregoski · February 20, 2021, 8:12pm

By saying the most reliable source I mean what is happening right here right now with USD, DXY index has high positive or negative correlation to basket currencies so for example if I plan to trade Cable I look what is happening on DXY chart first before looking at cable chart. So looking at the example there is MACD crossover of DXY and cable at simmilar time on 17 Feb 21:00 UK time. I consider this as strong confirmation to enter long trade on cable. It is not bullet proof and we never know if the pound goes up because of weakening of the dollar or it goes up because pound gets stronger. I hope this makes sense in some way.

Simmilar scenarion with EUR/USD and AUD/USD where the second one is not included in DXY index.

LordVo · February 21, 2021, 1:07pm

I saw this chart from @VaradMarkets on twitter and think it sums up your question in a good way. Hope this makes it easier to understand.

Make sure you go and read the post, as he tested the strategies.