Equity-Dollar Correlation: The Long View

Fri, Jan 22, 2010 | Jared Woodard

Economy, Market Commentary

A major story in late 2009 was the negative correlation between equities and the U.S. dollar. In the chart below, I show the correlation of the logarithmic daily price changes of the S&P 500 and the U.S. Dollar Index futures composite. It appears the attention has been well deserved: both the 3-month and 1-year rolling correlations are the lowest they’ve been in at least two decades.

No sooner than some investors began noticing the negative correlation, others started calling a bottom in the metric: a day or two of stocks and the dollar trading in the same direction was all it took for some bloggers to start claiming that the relationship had changed. So let’s zoom in a bit:

The chart above replaces one-year with one-month rolling correlation, and includes data through mid-January. As you can see, the rolling one-month correlation did move a bit closer towards zero around the turn of the month, coinciding with the light-volume holiday rally. But short-term correlation measurements are the very picture of statistical noise! For now, the only news is that there is no news.

I update charts for the S&P/dollar and S&P/gold rolling correlations in the free weekly Volatility Tracker.

Tags: , , , , , , ,

1 Comments For This Post

  1. Steve Place Says:

    I’ve been one of those “bottom callers,” although it’s easy to call a bottom on correlations as they can’t breakout like stocks!

    My thesis is that the correlation between equities and the dollar is tied to inflation, and if we start to see upticks of inflation (remains to be seen) then we should expect a decoupling of this relationship.

Leave a Reply


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


Open All | Close All