Why rise in dollar index is not a worry for stock markets

In a chat with ET Now, Klaus Baader, Chief Economist & Head of Research, Asia Pacific, Societe Generale, shares his view on dollar index.

ET Now: For the first time after a gap of many years, the inverse correlation between the dollar index and equities is not visible. Historically every time dollar index has gone up, equities have come down. What is your view on it?

Klaus Baader: It very much depends on why the dollar is going up. If the dollar is going up because there is a wave of risk aversion and investors are seeking liquid investments, then you would expect that to correlate or to coincide really with a weaker stock market.

At the moment, the dollar’s uptrend is not driven by fear principally but by increasing conviction that the US economy really is gathering steam. The factory orders data was very favourable in the US. We have had a string of positive numbers including capital goods orders etc. which suggest that the US economy is going to fire more evenly across the different sectors. In particular, one of the areas that has been falling short of historical upswings was capital investments which now is actually restarting.

Now apart from that, the US dollar rally is something that a lot of people have been waiting for for a long time and it did not really materialise. More recently, it has really got going. That is visible against not just the euro which is suffering from its only issues but against a whole range of currencies inclining currencies as diverse as the Japanese yen, the Australian dollar sterling etc.