Where’s the U.S. Dollar heading next? Ask the Dow.

Where’s the U.S. Dollar heading next? It depends on your time frame ofcourse. I break my trading charts into 15, 30, 60, 240 minute and daily charts. This means I could be looking at up to five different market cycles across the U.S. Dollar Index at any one time.

The current mood of the U.S. Dollar Index is being driven by the risk appetite and risk aversion swings in the equities market. I use the USD/JPY pair to determine whether the Dow or the Dollar is driving the dominant psychology.

Consider that these two markets – the Dow and the Dollar – push and pull one another. They have an inverse correlation which means when the Dow rallies, the Dollar gets pushed lower. This has to do with the risk appetite (buying “risker” equities) unwinding Dollar long positions (“flight to quality or safety”).

So knowing this, I know that each day before I trigger any entry on my dollar-correlated forex pair (EUR/USD, USD/JPY, GBP/USD, USD/CHF) and even my Comm Dolls (USD/CAD, AUD/USD, NZD/USD) that I must know what the Dow may do to the Dollar.

This also means that for those of you who watch or trade fundamentals, that as as long as the Dow is the driver, good news will rally stock and push the greenback lower.

For a look at the morning’s near term psychology, let’s look at the 15 minute time frame. Here’s a look at the U.S. Dollar Index and the Dow Jones as it looks pre-market:

11-3-2009 7-59-50 AM.gif

And here’s how I determine which market (the Dollar or the Dow) is driving the current psychology:

Here’s the USD/JPY — which is the pair that many trader use as the “risk appetite/risk aversion” barometer for the market — with the Dow (YM continuous contract). The USD/JPY is in green/red and the Dow Jones is in black/white:

11-3-2009 8-37-11 AM.gif

And here’s the USD/JPY and the U.S. Dollar Index:

11-3-2009 8-37-30 AM.gif

Notice which it is moving with? That’s the driver for the psychology!

I will discuss more of this futures-forex connection in the near futures and if you have specific questions, please go ahead and leave me a comment.

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  • charleyhankins

    In the second graphic, how is it that the USDJPY is leading the DOW. Shouldn’t they be moving in adverse directions?
    confused,
    CH

  • charleyhankins

    In the second graphic, how is it that the USDJPY is leading the DOW. Shouldn’t they be moving in adverse directions?
    confused,
    CH