According to JPMorgan analysts, an increase in correlation between US dollar and global shares indicates that the Greenback is increasingly losing attractiveness as a diversifier in portfolios.
• growing positive correlation between US dollars and stocks
• Increase in correlation according to analysts “normalization”
• Counterwind for the US dollar?
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Correlation between US dollar and stocks increases
In a recent customer analysis, according to Investing.com, JPMorgan refers to a slight but growing positive correlation between the dollar index – which measures US currency towards a currency basket – and the MSCI World Local Index. This positive correlation signals that the two asset class tends to move in the same direction.
In the years after Corona pandemic there was still a negative correlation. According to the analysts around Nikolaos Panigirtzoglou, there have always been phases with negative correlations in the past – for example since the 1980s.
But actually “this year’s increase in the US dollar share correlation towards zero or slightly positive area looks” according to the analysts “rather after normalization than after the occurrence of a new and unusual regime”.
Business for the US dollar?
The decreasing diversification effect could burden the US dollar in the future. However, the amount of the dollar stock correlation is as important as its sign. At level of zero or short above, the range is “too low in order to increase the volatility of a monetary-assured US stock portfolio”.
However, according to the analysts, there was hardly any evidence that shifts in the dollar share correlation gave the Greenback headwind. “We suspect that one reason is that the decision as to whether the currency risk should be secured in a stock portfolio is not easy,” said the analysts. “As long as the correlation between dollars and shares is not persistent and significantly positive for a longer period of time, as was the case from the mid-1980s to 2007 (0.2-0.4), it is unlikely that the protection of the currency risk in a share portfolio is sensible and sustainable,” quotes Investing.com.
Editor finance.net