Advocates of strong dollar are making a weak case

Guest Column: Evan A. Schnidman and Daniel J. Nadler
In almost every recent Republican presidential debate, some candidates have advocated for a “strong dollar.” More

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OP-ED

Advocates of strong dollar are making a weak case

Guest Column: Evan A. Schnidman and Daniel J. Nadler
Posted 1/30/12

In almost every recent Republican presidential debate, some candidates have advocated for a “strong dollar.”

Among the more extreme views are the push by Rep. Ron Paul for a return to the gold standard and the statement by Texas Gov. Rick Perry (who has since pulled out of the race) that Federal Reserve Chairman Ben Bernanke may have committed treason, a crime punishable by death.

What gets lost in this clamor is any discussion of winners and losers from a strong U.S. currency, and the recent correlation between the greenback’s strength and declines in the stock market.

A study we recently conducted indicates that investors – who constantly look for the most predictive correlations and lead indicators – could have done little better over the past five years than by tracking the relationship between the dollar and the Standard & Poor’s 500 Index. We found that simply looking for an intermediate high in the dollar could have successfully predicted every intermediate S&P 500 market bottom over the past five years.

This comparison of USD (U.S. Dollar Index) and the SPX (S&P 500) shows that on each of the seven occasions since 2008 when the dollar index reached an intermediate high, the S&P 500 hit an intermediate low. Perhaps no other asset in recent years has traded as precisely in (inverse) tandem with the market as the U.S. dollar. A weaker dollar might be easy fodder for politicians seeking to score rhetorical points, but it also has provided fuel for every intermediate market rally since 2009.

Beginning in late 2008, most major financial-news outlets conveyed some variation of a tight correlation between a weak dollar and rising stock prices. Our research finds that since 2008, the correlation has not only persisted but gotten tighter.

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