Over the last several months there has been a very close, some could argue almost perfect correlation between the US dollar and the US stock market, as measured by the S&P 500. As the dollar declines against other currencies, US exports become cheaper to foreign buyers, in turn increasing US corporate revenues. At the same time a weaker dollar typically turns investors towards riskier assets such as stocks.
If this correlation continues, any increase in the value of the dollar could correspond to a decline in the stock market. Conversely, if the dollar continues to decline, we should expect the stock market to continue to rise; as long as the correlation exists.
(Click on chart for larger image)
