I’m somewhat new to FX (at least when it comes to fundamentals) and I would like to know why is it that when the US Stock Market performs poorly/crashes the value of the dollar actually goes up. Thanks for the info!
The short answer is “risk aversion”.
Hi,
I do believe that this is my very first post on this particular forum i.e. me not being a fundamentalist in any way, shape, or form.
However I’d like to be involved in this particular discussion because I have an issue / concern as to how things are going to turn out when the Federal Reserve does eventually begin to (slowly I would imagine) raise interest rates.
Kindly correct me (John or anyone else) and / or give me your opinions on this.
To DIRECTLY answer nleonard64:
Insofar as the stock market versus the value of the USD is concerned: think of the trade. Buy the Dow Jones Industrial Average / sell the USD. In FOREX ‘speak’ think of it as a pair i.e. DOW/USD (or USD/DOW). There are of course many other factors that come into play of course so this is a VERY basic explanation / assumption.
Here’s MY issue / concern though:
Under normal circumstances (and by ‘normal’ I mean prior to sub-prime and the credit-crunch) when the Fed raised interest rates the indices would fall and visa versa. It was a foregone conclusion back then. THIS time around though: I’ve seen many an analyst saying that this may no longer be the case for the simple reason that when the Fed does indeed start raising interest rates this means that the economy is stabilising and this is good for the stock market and therefore the ‘old rule’ of ‘interest rates up / indices down’ will have been ‘turned on its head’ i.e. this time around it may be ‘interest rates up / indices up’.
What do you think of the above??? It’s just based on information that I receive from time to time from various analysts / websites that at some point in time I must have subscribed to for whatever reason at the time.
Regards,
Dale.
Big picture, general view: When the US economy is humming along it tends to mean increased demand for imports, which means a weaker dollar. When the economy isn’t doing as well, less demand for imports, so better for the USD. That’s the trade side. On the capital flow side, rising rates or the expectation thereof (especially vs. other G-7 nations) is good for the dollar. The trade and capital flow elements sometimes work together, and sometimes conflict. Keeps thing interesting. 
Now THAT was an ‘analyst answer’ if I ever saw one!!! LOL!!!
Bluntly then: if the Fed put interest rates up TOMORROW where would the Dow go all other things being equal??? LOL!!!
Regards,
Dale.
Seeing as all the equity guys seem to be thinking QE will last forever, a hike by Big Ben tomorrow would be a terrible shock and would probably cause a sharp drop initially. I think the market would otherwise be fine, though, seeing as rising rates at this point would indicate a stronger economy.
There is a lot of correlation between USD strength and the stock market.
That’s why it’s important to follow both
The better comment would be that there is sometimes a high correlation betwee the dollar and stocks. It’s actually quite a variable thing.
…and this all falls flat if the USD is no longer seen as a “safe haven” (refer to articles on S&P recent US downgrading). So I would agree there is a correlation but it’s dynamic and can flip at any time.
… and to Dale’s question, I’d say the Dow would go up, as there would be good risk appetite.
Lemme have a crack at this, I’m hoping Economics taught me something right…
The government raises interest rates as a way of controlling inflation and reducing the effects of an economic boom; slowing down or controlling economic growth While lowering interest rates will mean a rise in inflation and generate more economic production and activity - which is how the government attempts to soften recessions.
So if interest rates were increased, it would cause a slowdown in the economy. Wouldn’t that lead the Dow and other American indices to fall lower?
That’s my guess. Looking forward to the answer.
Regards,
Clark
The US dollar is losing its safe haven status. The Euro is also in trouble.
Let’s see who falls first
Hey ClarkFX,
That was exactly my point and my reason for getting involved here.
Under ‘normal’ circumstances I’d be ‘right there with you’ given that BEFORE sub-prime and the credit-crunch it was as predictable as the sun rising in the morning i.e. the Fed raises rates and the indices plummet. BUT, and this was what I was trying to confirm here (I’m just so sorry that I cannot find the analyst’s article where I read this so I could post the link here), when the Fed starts to raise interest rates, under THESE conditions, it means that the economy in the US is starting to recover by more than ‘just baby steps’ and that of course would be a GOOD signal for the stock market (at least that’s the way that I interpreted the article). As a matter of fact: I’ll go through my old emails now i.e. I seem to think it was an analysis by Jim (or is it Richard???) Wykoff at TraderPlanet. If I find it: I’ll post it here.
I guess (and this is what John was saying I reckon): there really are correlations between different instruments / interest rates / bond yields / markets etc. all of the time but they’re not ‘carved in stone’ i.e. any correlation is bound to break down or reverse at SOME point. Bloomberg TV, I must say, is quite good at presenting charts that show correlations that ‘used to be’ and are now ‘no more’ or now ‘inversely correlated’. If you’ve got the ‘big buckaroos’ for a Bloomberg Professional Terminal you’ll be able to get the same charts ‘on demand’!!! LOL!!!
Regards,
Dale.
Edit:
Sorry but I couldn’t find the article or newsletter to which I was referring (not without sitting here searching TraderPlanet for WEEKS using the search term ‘interest rates’) but I did find this that sort of ‘rings a bell’ (or is at least similar in content although the article or newsletter to which I was originally referrring was far better and more detailed): When interest rates rise so do stock prices - International Business Times
Edit 2:
Referring to 'good ‘ol Investopedia’ here’s a decent link and explanation (albeit, as I see it, explaining the effect of interest rates on the stock market in a ‘normal’ market or ‘ideal world’): How Interest Rates Affect The Stock Market
Great Investopedia link
Hello,
Thanks.
I have to say that the four very best and worthwhile sources of information (for me anyway) are Investopedia(.com), TraderPlanet(.com), ChartAdvisor(.com), and FuturesMag(.com) (and of course the New York Times)!!! LOL!!! Other than that I receive mostly ‘cr*p’ emails on a daily basis invariably trying to ‘give’ me something for ‘free’ ‘but you need to subscribe to get ALL the details’. Of the above links though: Investopedia and TraderPlanet are the only two that will really be of interest to FOREX traders. ChartAdvisor simply sends me a weekly analysis of the ETFs that ‘mimmick’ the cash indices which is always an interesting read (although let it be said that I know better now than to make any trading decisions based on anybody else’s analysis). FuturesMag, although dedicated to the trading of futures, always has some general information applicable to ALL traders (just take a look at their homepage TODAY and you’ll find some interesting insights on various topics that, even although directed at futures traders, pertain to ANY type of trader).
Regards,
Dale.
Oh I see, how interesting.
So under normal market conditions, my answer is correct?
But because the United States is currently in the process of recovery, the Feds actually raised interest rates to control the rate of growth? And because of this action, one may believe that the US economy is recovering too fast, which is a good signal, as a result, traders invest more into domestic trade and less in foreign markets causing a rise in the Amercian indices?
Regards,
Clark.
When the Fed increases interest rates it won’t be due to the US economy growing too fast - because it won’t be. It’ll more likely to be an effort to contain inflation which is already taking a bit of a grip in the US (and all over the world) and to make an effort to wean banks off all that free money they’ve been binging on for the past while. Of course the Fed says there virtually is no inflation in the US which is fine if you don’t have to, you know, eat or drive your car anywhere.
The major stock market participants probably won’t like rates going up much - right now they can borrow money from the Fed really cheaply to leverage up into investments to try and repair their damaged balance sheets. You just had to witness news being released to the market during the first QE program. When there was good US economic news it meant that US interest rate expectations rose along with USD as a result. Perversely stocks would actually fall as it was signalling that perhaps QE1 would end and there’d be less free money floating around. When there was bad news stocks would actually go up as it was figured that QE would be extended and USD would fall as interest rate expectations receded.
What’ll determine the course of the stock market over the next while is what’s going to happen once QE2 ends in June in my opinion. QE2 has been providing a ton of free money to the big financial players through the POMO operations. The Treasury auctions the debt to the Primary Dealers who then flip the bonds to the Fed a few weeks later for a profit. With all this cheap liquidity sloshing around they’ve been able to pour tons of cash into the stock market. It’s not been possible to be short the markets for long throughout QE2 as you would’ve gotten murdered by all the dip buying. However if QE2 ends in June that’s going to take away the sugar high the big players have been running on for a while now. If the recovery is strong enough maybe the gains will be held but if not… we’ll see a fairly sizeable correction as participants sell off as quick as they can and book their profits. And then wait for QE3 to be announced. With a sharp sell-off in stocks would probably come USD strength. If QE3 is announced the dollar will tank again.
The US stock market strength is somewhat illusory at the moment. It’s been bought by the Fed via it’s QE programs as even if people want to be short because they don’t agree with the fundamentals it’s not possible to take that route. You can’t fight the Fed as the saying goes. It’s intention is to give the appearance that the economy is on a stronger footing than before. They know they can’t really boost the job numbers but they can give the stock market a good pumping by printing a ton of money. I guess they think that if they can make people think it’s ok then people will get back to the business of hiring people and putting their money into investments again. If the recovery really starts to get on track look to the jobs numbers rather than the stock market - if 350k are being added every single month consistently that’s a better sign. Though you’re probably better off looking at the BLS revised numbers and not the initial numbers that they release - for some unfathomable reason the initial numbers are always higher than the revised ones. Of course the stock market rallies on the good news but doesn’t dip on the revised numbers which makes it a clever bit of number manipulation. Anyway, that’s just my take on things.
I think you’re sport on. So the dollar would benefit if money is pulled from the US stock market
PipBandit:
Now you see: it’s ‘understanding’ like this (yours) that I lack (hence my trading with little dots and lines only)!!! How do you know all of this??? I’m impressed to say the least and thanks for the great insight (and by the way the part of your quote that I ‘bolded’ really gave me a good ‘chuckle’).
I believe (from a business show that I listen to every night on the radio) that tonight (well MY tonight anyway i.e. GMT+2,) for the very first time ever, Ben Bernanke is going to hold a press conference after the FOMC announcement / meeting is over. Apparantely: this should give ‘clues’ as to whether or not there is going to be any ‘QE3’ or, as the analyst put it, there may be a ‘QE LITE’ i.e. a sort of ‘hint’ that QE is coming to an end. Apparantely: whatever happens tonight is supposedly quite a ‘big deal’. Of course it doesn’t help me much i.e. for the first time in a long time I’m ‘scared’ to place orders on the major indices in any direction.
But once again: thanks for the insight.
When the Fed increases interest rates it won’t be due to the US economy growing too fast - because it won’t be. It’ll more likely to be an effort to contain inflation which is already taking a bit of a grip in the US (and all over the world) and to make an effort to wean banks off all that free money they’ve been binging on for the past while. [B]Of course the Fed says there virtually is no inflation in the US which is fine if you don’t have to, you know, eat or drive your car anywhere.[/B]
The major stock market participants probably won’t like rates going up much - right now they can borrow money from the Fed really cheaply to leverage up into investments to try and repair their damaged balance sheets. You just had to witness news being released to the market during the first QE program. When there was good US economic news it meant that US interest rate expectations rose along with USD as a result. Perversely stocks would actually fall as it was signalling that perhaps QE1 would end and there’d be less free money floating around. When there was bad news stocks would actually go up as it was figured that QE would be extended and USD would fall as interest rate expectations receded.
What’ll determine the course of the stock market over the next while is what’s going to happen once QE2 ends in June in my opinion. QE2 has been providing a ton of free money to the big financial players through the POMO operations. The Treasury auctions the debt to the Primary Dealers who then flip the bonds to the Fed a few weeks later for a profit. With all this cheap liquidity sloshing around they’ve been able to pour tons of cash into the stock market. It’s not been possible to be short the markets for long throughout QE2 as you would’ve gotten murdered by all the dip buying. However if QE2 ends in June that’s going to take away the sugar high the big players have been running on for a while now. If the recovery is strong enough maybe the gains will be held but if not… we’ll see a fairly sizeable correction as participants sell off as quick as they can and book their profits. And then wait for QE3 to be announced. With a sharp sell-off in stocks would probably come USD strength. If QE3 is announced the dollar will tank again.
The US stock market strength is somewhat illusory at the moment. It’s been bought by the Fed via it’s QE programs as even if people want to be short because they don’t agree with the fundamentals it’s not possible to take that route. You can’t fight the Fed as the saying goes. It’s intention is to give the appearance that the economy is on a stronger footing than before. They know they can’t really boost the job numbers but they can give the stock market a good pumping by printing a ton of money. I guess they think that if they can make people think it’s ok then people will get back to the business of hiring people and putting their money into investments again. If the recovery really starts to get on track look to the jobs numbers rather than the stock market - if 350k are being added every single month consistently that’s a better sign. Though you’re probably better off looking at the BLS revised numbers and not the initial numbers that they release - for some unfathomable reason the initial numbers are always higher than the revised ones. Of course the stock market rallies on the good news but doesn’t dip on the revised numbers which makes it a clever bit of number manipulation. Anyway, that’s just my take on things.
Regards,
Dale.
Well, the Fed has been signalling pretty clearly for the past while that QE2 will end in June so FOMC tonight probably won’t drop any major bombshell in my opinion. We might get Bernanke talking up the USD a bit if he wants to throw a bone to the average American consumer and show that he recognises inflation. But I can’t see any DXY bounce lasting too long while QE2 is ongoing.
If I was long anything in the stock markets (which everybody is as being short is suicide unless very short-term) I’d probably be looking at closing out in May. There’s a lot of uncertainty about what happens next. For one who’s going to buy all the debt that the US Treasury issues once the Primary Dealers can’t play flip the bond back to the Fed? The PDs are happy to buy the stuff now as they know they can get rid of most of it very quickly and for a profit. If the Fed isn’t buying though once QE2 ends I can’t see institutions buying US debt at the price it’s going for today. PIMCO got rid of all it’s USTs for this reason and have now even taken up a short position against them. Should all make for an interesting summer 
Who knows:
Maybe the old saying ‘sell in May and go away’ may become ‘fashionable’ again!!! LOL!!!
Regards,
Dale.