Equity-Dollar Correlation: The Long View

A major story in late 2009 was the negative correlation between equities and the U.S. dollar. In the chart below, I show the correlation of the logarithmic daily price changes of the S&P 500 and the U.S. Dollar Index futures composite. It appears the attention has been well deserved: both the 3-month and 1-year rolling correlations are the lowest they've been in at least two decades.

No sooner than some investors began noticing the negative correlation, others started calling a bottom in the metric: a day or two of stocks and the dollar trading in the same direction was all it took for some bloggers to start claiming that the relationship had changed. So let's zoom in a bit:

The chart above replaces one-year with one-month rolling correlation, and includes data through mid-January. As you can see, the rolling one-month correlation did move a bit closer towards zero around the turn of the month, coinciding with the light-volume holiday rally. But short-term correlation measurements are the very picture of statistical noise! For now, the only news is that there is no news.

I update charts for the S&P/dollar and S&P/gold rolling correlations in the free weekly Volatility Tracker.