Why does the USD correlate to the stock market ?

An explanation that´s sometimes given is the carry trade: institutions borrow money in the USD, at 0% interest and let it accumulate interest in a country with higher rates. However, I find that hard to believe. Let´s say that in the best case, theres 3% to be made in a year. The dollar moves more than that in a week ! So why would anyone go for 3% if you could easily lose large multiples of that ?

Any thoughts on the carry trade explanation and/or other explanations for the usd/stock market correlation ?

 

1) The extremely high levels of correlation between markets come about when too much money does the same thing at the same time. A positive feedback loop develops that compounds on itself.
2) The "3% return" can be highly leveraged and hedged bringing about enormous risk-adjusted returns.

 

What is the stock mkt, or, more precisely, returns from investing in the stock mkt, denominated in?

 

Not sure what you´re getting at, please explain.

 

Hmmm... hedged ? I´m pretty sure that the costs of hedging would be more than the possible return on the carry trade itself. And if you leverage the trade, you also leverage the risk, that wouldnt be very useful I think ?

 

The equity curve of 3% AUDUSD leveraged 10x then at some point looks very "Madoff" like: an exponential graph that suddenly implodes

 

amazingly easy...companies in Dow and SP500 are mainly US companies and mainly use the USD...hence, they track each other

 

Sorry, I should be more clear... Since I am lazy, this gives the reasoning in relatively simple terms:
http://www.tradersnarrative.com/why-weak-dollar-helps-the-stock-market-1340.html

There is also interest rate parity. Everything else being equal, strong dollar has to result from the pricing in of Fed hikes. That's bad for stocks, for all the obvious reasons.

 

Ummm... not really.

Half of the S&P derives a significant of their earnings from overseas.

Moreover, if you were to take a look at the worst performing sector of the market for Q3 based on sales/revs and EPS, it would have been ENERGY.

Guess what was the best performing sector in the stock market in Q3?

ENERGY.


Can you say love the weaker Dollar?

 

There was an article in the december issue of 'the economist', asking the exact same question. In short, they said that with some advanced techniques, it IS possible to make money this way (with the carry trade), for more info, I refer to that article.