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What’s Driving the Dollar Lower, and Can it Continue?

What’s Driving the Dollar Lower, and Can it Continue?

David Rodriguez, Head of Product

Article Summary: The DJ FXCM Dollar Index (ticker: USDOLLAR) trades at its strongest-ever correlation to US Government Bond Yields. What does this mean for Dollar forecasts and trades?

Correlation between US Dollar Index (ticker: USDOLLAR) and US 10-Year Treasury Yield Near Record

us_dollar_correlation_to_us_treasury_yield_at_record_body_Picture_5.png, What’s Driving the Dollar Lower, and Can it Continue?

Data source: Bloomberg, Chart Source: R

The strong correlation almost certainly is linked to the US Federal Reserve, and as such the Fed’s next moves are critical to outlook for the recently-downtrodden US currency. A chart below underlines the significance of the post-FOMC and post-Bernanke price level extremes on the Dow Jones FXCM Dollar Index.

Dollar Surges Post-FOMC Meeting then Tumbles Post-Bernanke—currently at key level

us_dollar_correlation_to_us_treasury_yield_at_record_body_Picture_6.png, What’s Driving the Dollar Lower, and Can it Continue?

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez

Where does this leave us? As an old saying goes, “Don’t fight the Fed.” Bernanke and Co. are not scheduled to meet this week, and a view of top 5 pieces of forex economic event risk shows that there’s no significant US data on the schedule.

Yet it will be critical to watch next week’s potentially pivotal US Nonfarm Payrolls report as Bernanke made it quite clear that the Federal Reserve’s next moves will depend on labor market trends. (See it on the DailyFX Economic Calendar)

In the meantime we believe that especially low forex market volatility hurts outlook for the safe-haven US currency, and indeed our short-term preference remains to sell into US Dollar weakness absent a turnaround in market sentiment.

I’ll continue updating changes to conditions via my regular reports—follow future updates via my e-mail distribution list and intraday via Twitter.

Forex Correlations Summary

View forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

us_dollar_correlation_to_us_treasury_yield_at_record_body_Picture_7.png, What’s Driving the Dollar Lower, and Can it Continue?

Data source: Bloomberg. Chart source: R


--- Written by David Rodriguez, Quantitative Strategist for

Receive future special reports on the Australian Dollar and other studies via this author’s e-mail distribution list with this link.

David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.

Contact and follow David via Twitter:

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.