The sky is falling! Interactions between DXY and the stock market

In my studies of the stock market behavior and other various macro-economic trends, I found a fascinating correlation between the US dollar index, DXY and the Dow Jones Industrial Average.

The US dollar index is a measure of the US dollar in comparison with a basket of currencies as defined by the group that dismantled the Bretton Woods Standard in 1971.  It effectively measures the value of the US dollar relative to other large free market economies in the world.  It is often construed as a measure of the relative confidence in the US in the world as a whole, because when people change their money to hold US dollars, then this index will increase in value, and visa versa.


I have been tracking a few comparison charts between the intra-day value of the DXY index versus the DJIA and SP500 values for several days.  The charts below display the information:

 Intra-day Chart for 16 Nov 2010

 Intra-day Chart for 29 Nov 2010 

 Intra-day Chart for 02 Dec 2010

 Intra-day Chart for 03 Dec 2010

Weekly Chart for 2006-2010

These charts very clearly show a nearly directly inverse relationship that is on an approximately 1.5x multiplier.  Each time that the dollar changes value, all of the assets that are demoninated in the US dollar change in value inversely as a result.  This causes people who are price watching to perceive this as a drop in the asset price, when in reality it is only a revaluation of the asset in relation to the value of the US dollar.  This apparent price drop will cause people to begin to sell off the actual underlying asset resulting in a real decline in the value of the asset.

My theory is that the value of the dollar changes due to changes in the US dollar holdings in comparison to the other major economies of the world, and that these changes produce inversely correlated changes to the prices of all assets denominated in US dollars which then causes people (or computers) to begin selling off the actual assets on an effectively imaginary drop in the asset price which produces the multiplier effect and therefore the real change in the asset price.

I would even go so far as to postulate that if a significant enough change in the value of the US dollar, the corresponding change in asset prices would begin to trigger a chain reaction of sell/buy orders that would induce a 'flash crash' into the market, all based on speculation on the US dollar and perceptions of the nations abroad.

I am still considering the various applications of this theory, and I will present more when I come up with a concrete theory.