Dollar is at six-month highs
The US dollar index (UUP) is at six-month highs. On October 12, 2016, the dollar index was trading at 97.8. On May 2, 2016, the dollar index hit its 12-year low of 92.6. The dollar index reacts positively to interest rate hikes.
Earlier in 2016, the Fed showed some urgency about hiking rates and declared it would hike rates at least twice before the end of 2016. However, in mid-February, Fed chair Janet Yellen hinted at a dovish stance due to increasing global growth (ACWI) (VTI) concerns. The Fed maintained its dovish stance at the March and April meetings, which pushed the dollar lower in May 2016. The Fed also maintained the status quo due to weaker inflation at its September meeting. The probability of a rate hike in December is increasing, which is pushing the dollar index (UUP) up.
Correlation with the S&P 500 Index
The S&P 500 Index (SPY) has been falling marginally. Currently, the one-month correlation between the dollar index and the S&P 500 Index (QQQ) is around 31.8%. Between March 2009 and September 2014, the US dollar (UUP) was negatively correlated with the S&P 500 Index (IVV). The S&P 500 Index rose nearly 135% during this period, and the dollar index fell nearly 4.5% during the same period.
The Fed’s prolonged lower interest rate after the 2008 subprime crisis was the main reason behind the weaker dollar. However, the Fed ended its quantitative easing in October 2014. The expectations of a rate hike after that boosted the dollar.
In mid-2014, commodity prices started their downturn. The huge fall in commodity prices dragged down the earnings of the energy and commodity sectors. However, the non-energy sector supported the performance of the S&P 500 Index. Read, Analyzing the S&P 500 Index’s Energy and Non-Energy Sectors to learn more.
In recent years, the correlation between the dollar index and the S&P 500 Index has been slightly positive due to support from non-energy sectors like technology (XLK), consumer staples (XLP), and others.
In the next part of this series, we’ll analyze how the dollar index is impacting emerging markets.