By Walter Kurtz, Sober Look

The dollar’s status as a “safe haven” currency (see this post for some background) came into question yesterday. Typically in a “risk on” equity rally, we’ve seen the dollar sell off. The reverse was also true as the dollar tended to rally in a “risk off” scenario (particularly when the world looked scary). “Safe haven” currencies tend to be negatively correlated with risk assets such as equities. But yesterday we saw both the equity markets and the dollar rally.

The US Dollar (DXY) vs. the Dow –

daily moves for the past 12 months (Bloomberg)

This change in correlation from negative to positive may indicate the market’s perception of US rates moving higher sooner than expected (which would make the dollar more attractive on a relative basis.) The Fed Funds Futures curve has shifted the expectations of the first Fed rate hike to June of next year (from August). These changed expectations should bode well for the dollar going forward, and days of the correlation reversal may become a more common occurrence.

Shift in Fed Funds Futures implied rate (Bloomberg)

Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

More Posts - Website


  1. Bolderdash ! The USD is NOT – I repeat – NOT a “”safe haven”” \. Commodities (especially oil) and lots of loans are priced in USD (more than in e.g. EUR) and that has SERIOUS implications for the USD(X). The USD is the senior currency and that means that the USD falls when the risk trade is on and the USD WILL rise when folks are selling their commodities and loans. I.e. sell their assets and buy cash (i.e. USD or EUR). And then the demand for USDs is larger than the demand for e.g. EUR.

    And here’s something a lot of folks don’t know: The USD is inherently a WEAK currency because the US is running/has been running Current Account Deficits since the 1960s. Whereas the EUR is (in spite of all its financial problems) an inherently STRONG currency because the EURO-zone is running a (small) Current Account Surplus.

  2. The correlation between treasuries and equities has also reversed, and the gap between the SPX and yields is closing (with yields rocketing higher, rather than equities crashing as was widely expected). Fundamental shift in sentiment.
    Mr. Market, you should never argue with Mr. Market…

  3. It likely has nothing to do with rates moving higher…

    It probably has everything to do with the idea that for the first time in a LONG time, the US Fed is not the marginal supplier of global liquidity / Fx debasement…

    That mantle now goes to the EU via LTROs and even the EMs as they continue to lower rates in the face of slower growth…

    In fact, the Fed is now talking sterilized QE…who would have ever imagined…

  4. SkySavage, B Ferro – both good comments. You guys get it.

    Everyone on this site has been saying for a while now that you can’t believe in this rally, that the bond market is right, that European risks are still high and that equities are getting ahead of themselves. They have turned out to be wrong.

    The question is … now that the whole world is doing QE, what are the implications?? There has got to be a way to trade this over the medium term – it’s an aberration.

  5. Today was like a brief taste of the late 90’s when stocks (especially tech stocks) were strong, the dollar was strong, and gold and silver were weak. Back then everyone wanted dollars so that they could purchase the latest high-flying dotcom stocks.

  6. This is my thinking on the market action:

    Europe and the European debt situation is now ‘fixed’ (of course it is not but as far as the myopia of wall street’s can see it sure is). Money that piled in safe havens like US treasuries (and gold, Yen) during the Greece crisis over the past several months is now finding its way “risky assets”. The US dollar will rally as the Yen carry trade unwinds and will be supported by the increasing demand for ‘risk on’ stocks, commodities and high yielding instruments and safer assets like treasuries, gold and safer currencies will get whacked.

    And as the yield increase, this will impact the economic recovery (housing, lending and business investment) and the Fed will need to act at some point to moderate yields when they are concerned with the impact yields have on economic recovery. The market is overbought on anything worth going long at this point and who knows how long this reallocation will take.