DJIA Bounces as US Dollar Falls
Friday, May 21, 2010 16:16The Dow Jones Industrial Average breached the 10,000 level at the open and then rallied back 180 points from the low to close at 10,193. In a previous post I mentioned that the major averages were close to major support levels while approaching oversold levels. Those levels were tested today before the market moved higher.
(Chart 1)
One of the key inter-market relationships which has emerged since 2001 or so, is that stocks tend to go down as the dollar strengthens while advancing on dollar weakness. On Tuesday, I informed my readers that the dollar was overbought and seemed due for a correction. As it turned out, Tuesday was the last day the dollar strengthened and dropped for 3 consecutive days (Chart 2). Weakness in the dollar is good for stocks.
Why the wild swings in the US dollar? Europe. The US Dollar index measures the currency against a basket of other foreign currencies, the largest of which being the Euro. A sharp decline in the Euro would, by default, cause an increase in the value of the US dollar. Not to mention the panic liquidation of European assets and the money flows back into the US via the treasury market. Chart 3 clearly shows the relationship between stocks, the euro and the dollar through the European crisis.




























