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Investing,com - The U.S. dollar traded with a positive correlation with equity during the U.S.-China trade war, but the two asset classes are unlikely to always dance to the same tune going forward, according to Capital Economics.
The U.S. dollar’s behavior over the trade war so far has been a little unusual, according to analysts at Capital Economics in a note, dated May 15. Arguably it should have appreciated when the larger-than-expected “Liberation Day” tariffs were announced; instead, it weakened.
Those who put store in its role as a safe haven might also have been surprised that it fell in early April when investors’ appetite for risk was seeming waning.
Our sense is that the recent correlations are less of an anomaly that they might seem, and therefore that they may continue. After all, while the dollar has typically been negatively correlated with the absolute performance of the U.S. stock market, it has historically been positively correlated with that market’s performance relative to others, reflecting fluctuations in global demand for U.S. assets, compared with those abroad.
With the stock market now firmly on the mend, and the dollar perhaps starting to perk up too, it’s reasonable to ask whether they’ll remain positively correlated over the rest of the year or whether the traditional negative relationship might reassert itself.
“On balance we suspect the U.S. dollar will be positively correlated with the performance of the U.S. stock market over the next year or so,” Capital Economics said. “But we don’t think the greenback’s role as a ‘safe haven’ is over for good.”