Debunking the Dollar Myth

 | Jan 30, 2012 | 12:00 PM EST
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This commentary originally appeared at 8:32 a.m. EST on Jan. 30 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.

Recently, a number of market observers (most notably Hedgeyes's lynx-eyed "Keithy" Keith McCullough and "The Kudlow Report's" Larry Kudlow) have opined that the health of U.S. equities is dependent on a strong U.S. dollar.

Based upon history, however, the notion that a strong U.S. dollar is a prerequisite for a strong U.S. stock market is a myth.

With the help of Ron Griess's invaluable The Chart Store, we have compiled the historical relationship between the U.S. dollar and the S&P 500.

Let's go to the charts.

S&P 500 vs. Euro
Source: The Chart Store
S&P 500 vs. U.S. Dollar Index
Source: The Chart Store

The R-squared, or coefficient of determination, is the most frequently used equation to determine correlation. The R-squared ranges from 0.0 (no correlation) to 1.0 (perfect correlation).

As one can see in the calculations below, other than in short windows, there is almost no correlation between the U.S. dollar and the S&P 500.

R-squared for S&P 500 vs. euro chart:

  • From 1999 = 0.003, with 3,289 observations
  • From 2006 = 0.024, with 1,530 observations
  • From 2009 = 0.051, with 775 observations

R-squared for S&P 500 vs. U.S. Dollar Index chart:

  • From 1999 = 0.005, with 3,289 observations
  • From 2006 = 0.024, with 1,530 observations
  • From 2009= 0.424, with 775 observations

Note: The U.S. Dollar Index is computed using a trade-weighted geometric average of six currencies. (The six currencies and their trade weights are: euro = 57.6%, Japanese yen = 13.6%, British pound = 11.9%, Canadian dollar = 9.1%, Swedish krona = 4.2% and Swiss franc = 3.6%.)

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