- The positive correlation between the U.S. dollar and U.S. stocks may be interrupted this quarter due to the decline in its attractiveness
- Data for the past 10 years shows that the US dollar index rose by an average of about 1.7% in the fourth quarter
- If inflation rises due to the Fed’s dovish stance and increased stimulus measures, the dollar will suffer losses as real yields fall and stocks may rise.
On Tuesday, the positive correlation between the U.S. dollar and U.S. stocks may be interrupted this quarter due to the decline in its attractiveness as an arbitrage currency and possible fiscal stimulus. Data from the past 10 years show that the US dollar index rose by an average of about 1.7% in the fourth quarter.
Meanwhile, the S&P 500 index rose by 1.9%. The index generally outperforms its foreign counterparts. As of now, the US dollar index is at 93.52, an intraday increase of 0.06%. However, under the impact of the pandemic, the seasonal pattern of currencies has changed in 2020, and this year is another election year.
This correlation may be further broken. Stimulus measures may boost economic optimism and curb demand for safe-haven assets such as the US dollar. The Federal Reserve’s loose monetary policy has reduced yields and weakened the attractiveness of dollar arbitrage transactions.
If inflation rises due to the Fed’s dovish stance and increased stimulus measures, the dollar will suffer losses as real yields fall and stocks may rise. If the upcoming US presidential election interrupts the stock market’s gains in the fourth quarter, this relationship may also be reversed.
President Trump’s infection with the new coronavirus, possible lockdowns, and intractable concerns about the outcome of the general election may all increase uncertainty.
The U.S. dollar weakened against risky currencies on Tuesday. The U.S. dollar index is still hovering at a two-week low. It is currently trading at around 93.43. Because the outside world has become more optimistic about US congressmen, they may reach an agreement on a new economic stimulus plan. U.S. President Trump’s discharge from the hospital and return to the White House also improved risk appetite.
House Speaker Rep. Nancy Pelosi (D-CA) and Treasury Secretary Steven Mnuchin had a phone conversation on Monday for about an hour on the issue of economic relief from the new coronavirus, and prepared to meet again on Tuesday to continue their recent series of talks to reach an agreement on legislation. White House Chief of Staff Mark Meadows said Trump is committed to reaching a new coronavirus rescue agreement.
On the other hand, Trump returned to the White House after receiving three days of treatment for new coronavirus pneumonia in the hospital, but there are still unresolved questions surrounding his situation.
At the same time, there are also questions about whether he is willing to abide by the necessary restrictions to prevent the White House’s new coronavirus epidemic from worsening.
Before Trump was discharged from the hospital on Monday night, his physician, Sean Conley, said that although the president’s health meets the conditions for discharge, he “may not be completely out of danger,” and will receive further care at the White House in the next few days.
Within hours of Trump’s arrival at the White House, officials announced a series of measures, including limiting contact with the president and providing protective equipment to those meeting him. These measures are designed to prevent the further spread of the infection. Previously, several key assistants, including press secretary Kayleigh McEnany, tested positive for the new coronavirus.
Yafumi Yamamoto, the chief foreign exchange strategist at Mizuho Securities, said, “I think the hope of the US stimulus plan is the main driving force. As for Trump’s discharge, the impact is not obvious, but to some extent, it is good for the risk environment because of this.”