While the declining dollar seems to be fueling gains in stocks and commodities like gold and oil, the fact remains that a weak currency is a major long-term concern for the health of the US economy.

The current market situation reminds me of some quotes by “wise men” of the past:

“It’s all about the Benjamins baby” – Rapper P. Diddy
“Follow the money” – Watergate’s Deep Throat
“Go where the money is” – Bank robber Willie Sutton

The bottom line currently is that the declining dollar seems to be more and more of the impetus pushing dollar-denominated assets such as US stocks (using the Spyder Trust (SPY) as a proxy), gold (SPDR Gold Trust (GLD)), and crude oil (United States Oil Fund (USO)).

Historically, there is not a strong correlation between the movements of the dollar and these assets. However, since last June, we’ve seen an inverse relationship between these widely traded securities.

We’re using Powershares DB US Dollar Index Bullish Fund (UUP) to represent the dollar, since all 4 of the above ETFs are widely available for virtually all investors.

You can see in the relative performance chart below that UUP (red line) is down over 17% since June 2010.  And during this exact time, we’ve seen a relatively steady uptrend in SPY, GLD, and USO, which are all up 22%-35% in that same time frame.

Click to Enlarge

This certainly looks to me as if the declining dollar tail is wagging the asset dog. Money held in dollars has flowed into stocks, gold, and oil as they become relatively “cheaper.” 

And you don’t want to fade this type of strong trend, as many bears have found when their paws keep getting trapped on days like Wednesday when we get huge gains in the markets.

NEXT: Weak Dollar is Good for Assets, but Bad for the Economy

Tickers Mentioned: Tickers: SPY, GLD, USO, UUP