. . Likely get a positive correlation if took into account the...

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yellowgsum

11,522 Posts.

22/02/17

09:27

Post #: 22799822
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Originally posted by timber1956 ↑

"if interest rates didn't make you jump, what of the impact on the USD of higher rates?"

When @Proctalgia asked this very good question, I had to stop and think.

Years of experience taught me that rising US interest rates should draw investors, make the US dollar attractive and squeeze out the carry trade. Right? Flying by the seat of my pants, I would have said that the correlation between US interest rates and the US dollar index was between 0.25 and 0.50, which mean they move together most of the time.

But the GFC has shaken a lot of our standard models, so I down loaded 10 years of daily USD index and 10 years of daily US Treasury Note rates to test this thesis, and was in for a bit of a shock:

View attachment 473351

The correlation was -0.45!

Since 2011, the US dollar has been appreciating while US interest rates have continued to fall.

So in answer to @Proctalga's question, the USD has not been responding to falling interest rates in the way that is expected. If the USD continues to strengthen as US interest rates rise, I think that we can conclude that US interest rates are not a material factor deciding the direction of the US dollar.

With respect to the price of gold, I think that this is consistent with my view (set out in earlier posts) that gold investors shouldn't pay too much attention to what the Fed is doing on rates.

Cheers

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Likely get a positive correlation if took into account the interest rates the USD Index is paired to, weighted average, ie something along lines of

USD Index = A + B * Sum (weight*(US_10yr - Basket_10yr))

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. . Likely get a positive correlation if took into account the...

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