All Roads Lead to -- and from -- the U.S. Dollar

U.S. Dollar Down, Everything Else . . Up!

Perplexed by the action in stocks and commodities since last Spring? (I've addressed housing in many, many other posts.)

See the explanation (below), courtesy of David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff.

It's a bit wonky -- note the references to the DXY, VIX, various credit spreads, etc. -- but very worthwhile.

The reader's digest version?

As the dollar declines . . . it's driving up everything else.

The U.S. dollar . . . has become a huge ‘carry trade’ vehicle for all risky assets. Historically, there is no correlation at all between the DXY index (the U.S. dollar index) and the S&P 500. In the past eight months, that correlation is 90%. Ditto for credit spreads — zero correlation from 1995 to 2008, but now it has surged to 90% since April. There was historically a 70% inverse correlation between the U.S. dollar and emerging markets, such as the Brazilian Bovespa, and that correlation has also increased to 90% since the spring. Even the VIX index, which historically has had no better than a 20% correlation with the U.S. dollar, has now sent that correlation surge to 90%. Amazing. The inverse correlations between the U.S. dollar and gold and the U.S. dollar and commodities were always strong, but these too have strengthened and now stand at over 90%.

--David Rosenberg, "Breakfast with Dave" (11/19/09)

I consider my financial vocabulary to be pretty extensive, but I've seen so many references to the DXY the last few weeks that I finally googled it to find out.

It turns out to be a basket of six, non-U.S. currencies that reflects the strength/weakness of the dollar.

If you read the above excerpt, you know which way it's been going.