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Dollar Index Closely Linked to Dow Jones, Crude Oil, Gold Prices

Dollar Index Closely Linked to Dow Jones, Crude Oil, Gold Prices

2011-05-31 17:00:00
David Rodriguez, Head of Business Development

The US Dollar remains strongly correlated to equities and commodity prices, as the Dow Jones FXCM Dollar Index sees record correlations to the Dow Jones Industrial Average, NYMEX WTI Crude Oil contract prices, and spot gold exchange rates.

As the second-lowest yielding major world currency, the US Dollar is a speculator’s favorite as a cheap funding source for investments in higher-yielding and higher-return asset classes. Said dynamic explains the strong link between the USD and the Dow Jones Industrial Average, while the fact that the US is a large net-importer of Crude Oil largely explains its link to futures prices.

The US Dollar remains weak as traders expect the US Federal Reserve will keep interest rates at record-lows and monetary policy loose through the foreseeable future. As long as the Fed maintains its current bias, expect the Dollar Index to remain a strong proxy for moves in the Dow Jones Industrial Average, Crude Oil, and Gold prices.

Forex Correlations Summary

Forex correlations against Oil, Gold, and the Dow Jones Industrial Average for the past 30 calendar days:

forex_correlations_dollar_index_crude_oil_gold_dow_jones_body_Picture_1.png, Dollar Index Closely Linked to Dow Jones, Crude Oil, Gold Prices

Read a guide on understanding the forex correlations summary chart.

forex_correlations_dollar_index_crude_oil_gold_dow_jones_body_Picture_4.png, Dollar Index Closely Linked to Dow Jones, Crude Oil, Gold Prices

Dow Jones FXCM Dollar Index vs Dow Jones Industrial Average

The US Dollar’s link to the Dow Jones Industrial Average has almost literally never been stronger, underlining that the USD is likely to decline if we see further strength in equity prices and broader ‘risk’. As the second-lowest yielding major world currency, speculators have been quick to borrow US Dollars as a cheap funding source for higher returns elsewhere.

As a result we see the US Dollar decline when relatively risky assets such as the Dow Jones Industrial Average become more attractive. In times of DJIA declines, the US Dollar often rallies as speculators become more risk averse and close their leveraged high-yielding bets. We are likely to continue to see the US Dollar act as a strong proxy for the Dow Jones Industrial Average and other key ‘risk’ barometers.

forex_correlations_dollar_index_crude_oil_gold_dow_jones_body_Picture_5.png, Dollar Index Closely Linked to Dow Jones, Crude Oil, Gold Prices

Dow Jones FXCM Dollar Index and the Price of Crude Oil

The US Dollar has likewise remained heavily correlated to global commodity prices and quite specifically the price of crude oil. As a large net-importer of Crude Oil, the US is particularly susceptible to shifts in the energy prices, and the effect can be seen in the cross-market correlation. Indeed, the 20-day correlation between Crude Oil prices and the Dow Jones FXCM Dollar Index recently hit its strongest levels on record.

The US Dollar remains a good proxy for trading broader shifts in commodity markets, and as our chart shows Crude Oil is no exception.

forex_correlations_dollar_index_crude_oil_gold_dow_jones_body_Picture_6.png, Dollar Index Closely Linked to Dow Jones, Crude Oil, Gold Prices

Dow Jones FXCM Dollar Index and Price of Gold

The US Dollar remains heavily correlated to Gold prices, as the precious metal remains a widely-used hedge for Greenback weakness amidst its pronounced long-term downtrend. Fears over US Federal Reserve monetary policy has likewise increased the attractiveness of owning gold instead of US Dollars: controversial Quantitative Easing measures raise the risk of USD-denominated inflation.

Market focus remains on whether the US Federal Reserve will move to tighten monetary policy through the foreseeable future. The second Quantitative Easing program (QE2) is scheduled to end in June—setting a key showdown on whether the controversial measures will be extended. Outlook for Gold prices and the US Dollar itself could shift significantly on unexpected action from the Federal Reserve.

The US Dollar remains a strong proxy for trading Gold prices.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To join this author’s distribution list, send an e-mail with subject line “Distribution list” to drodriguez@dailyfx.com .

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FOREX CAPITAL MARKETS® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FOREX CAPITAL MARKETS® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FOREX CAPITAL MARKETS® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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