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December 17, 2009

The dollar and the stock market

Everyone tries to figure out the stock market by looking for predictors of how the market might move. Recently, some people have pointed to a relationship between the dollar's value and the stock market. What is the theory?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, this is very interesting. In fact, you can see it almost daily if you do watch the stock market. On days in which the dollar is down - that is, in which the dollar has become weaker against other currencies - frequently we have seen the stock market go up. And conversely, on days when the dollar is up - on which the dollar has become stronger - we've actually seen the stock market go down. Now the question is, does this make sense? A lot of people would think, well, strong dollar, that should mean good things for the U.S. economy and good things for the stock market, and the opposite with a weak dollar. Well, here's what economist think is going on. When the dollar has dropped in value, investors look for other things to invest in than the dollar. So they're looking at things like gold and commodities and stocks. Conversely, when the dollar gets stronger, investors say, well, we can invest in the dollar, the dollar's stronger. So you will see investments in things like treasury securities, which are denominated in U.S. dollars. Those investments go up, and investments in stocks and commodities go down. The big question is whether this relationship - which has been pretty tight over the last few months - will continue to hold as our economy evolves."

Posted by Dave at December 17, 2009 08:00 AM