Intermarket Analysis for the Dollar Index

03/16/2010 12:01 am EST

Focus: FOREX

Corey Rosenbloom

Founder and President, Afraid to Trade

I wanted to highlight a few quick recent charts of how the US dollar index positively correlates (moves in the same direction) with the three-month Treasury bill discount rate.

It’s not the most fascinating topic, but it’s definitely important to know of this relationship, so let’s take a look at a couple of recent charts. First, a “zoomed in” view of the recent action:

Click to Enlarge

You can view this comparison on charts with the following symbols:

1) IRX for the three-month T-bill discount rate (short term)

2) USD (US dollar index—a basket of six forex pairs)

What’s interesting is that—relatively—the indexes move almost in lock step with each other, which makes sense.

While this isn’t the Fed funds rate, in general, higher rates translate into a more attractive (expensive) currency, and lower rates translate into a weaker currency for a country.

We’re seeing this in the recent charts of short-term Treasury yields and the dollar index, as expected.

This is in line with talk of the Fed “eventually” (at some point in the future) raising the Fed funds rate, but that is an entirely separate discussion.

Let’s step the chart back to see the one-year comparison in yields and the dollar index:

Click to Enlarge

In both charts, the US dollar index (in green) is scaled on the left side of the chart, while the three-month T-bill discount rate is scaled in percentage terms on the right side.

Thus, the current 1.4 value corresponds with 1.4%.

The three-month T-bill rate—and shortly after, the dollar index—bottomed at the end of 2009 to give us the current simultaneous rallies we’re seeing.

I wanted to call this to your attention as an interesting comparison and method to sharpen your intermarket analysis skills.

By Corey Rosenbloom of