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Gold prices have regained their correlation to the US Dollar, as recent Fed actions limit flight-to-quality demand for the Greenback. The US Federal Reserve recently announced sizeable purchases of US Government Treasuries and mortgage-backed securities, fueling fears of excessive US inflation.

FX markets have summarily punished the USD following the Fed's actions, and US Dollar outlook remains bearish through the foreseeable future. Indeed, the dollar has seemingly lost its link to key risky assets and, more importantly, its position as a safe-haven store of value.

Forex Correlations Summary

Forex correlations against Oil, Gold, and the Dow Jones Industrials Average for the past 30 calendar days:

Strongest Forex Correlations

Euro/US Dollar and the
US S&P 500 Index

The Euro/US Dollar has held a near record-high correlation to the US S&P 500, emphasizing that both currencies are firmly linked to global risk trends. The recent upturn in global risk markets bodes poorly for the US currency. Indeed, S&P 500 losses were a key source of support for the historic safe-haven currency. Yet recent events suggest that the US dollar may in fact lose its safe-haven status against major world currencies. The US Federal Reserve's Quantitative Easing has sparked fears that the USD will lose its luster as a reserve currency. It will be critical to watch EUR/USD - S&P correlations going forward.


Euro/US Dollar and the Price of Gold

The correlation between Gold and the US Dollar has recently recovered. Gold has historically been used as a hedge against US Dollar weakness, but recent market dynamics actually showed precious metals prices move virtually lock-step with the US currency. Overall risk trends meant that investors would seek the safety of both gold and the USD versus major counterparts. Yet the Fed's recent actions put the US Dollar's safe-haven status into clear doubt, and gold prices are once again moving inversely to the Greenback. The turn in correlation is arguably an ominous signal for the US Dollar.


Weakest Forex Correlations

Australian Dollar/US Dollar and
the Reuters CRB Commodities Index

The Australian dollar has begun to outperform commodity prices—boosting outlook during times of declining global consumption. Indeed, the Reuters CRB Commodities Index has fallen nearly 60 percent off of its 2008 highs, and the AUDUSD managed a more moderate 40 percent peak-to-trough drawdown. More recently we see the Aussie significantly outperforming the downtrodden commodities index. It seems as if the AUD may remain steady in spite of massive global economic headwinds—welcome news for AUD bulls.


Euro/US Dollar and
Crude Oil Futures Prices

The highly-touted link between the US Dollar and Crude Oil prices has become virtually insignificant, as the US Dollar has moved largely independently of developments in commodity markets. Whether or not this is a temporary shift is up for debate, but we would argue that the sharp drop in crude oil costs decreases its real impact on the US Dollar exchange rate. Regardless of the reasons, it seems that crude oil is currently of very little significance to US dollar currency pairs.


Written by David Rodriguez, Quantitative Analyst for
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