What Dow Surge Means for the Euro

03/06/2013 9:00 am EST

Focus: CURRENCIES

David Rodriguez

Quantitative Strategist, DailyFX.com

The DJIA has traded to record highs, and forex correlations suggest this may help the euro recover against the resurgent US dollar, says DailyFX quantitative strategist David Rodriguez.

Both stock markets and the euro tumbled as financial markets expressed their disappointment with the Italian election results, but the speed with which the Dow has recovered suggests that traders are not quite ready to force risky assets off of their highs.

Correlation between the US S&P 500 and S&P 500 Volatility Index (VIX)

The correlation between the Dow Jones Industrial Average and the euro/US dollar exchange rate trades near its highest levels in a year, and a surging DJIA bodes well for the otherwise-downtrodden EUR/USD.

Dow strength suggests that the euro may likewise prove resilient, and indeed our technical forecast for the euro favors strength above the key $1.30 mark.

Correlation Between the Dow Jones Industrial Average and the Euro/US Dollar

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The Dow Jones FXCM Dollar Index (USDOLLAR) tends to weaken during times of strong equity market performance, but the Index actually trades near multi-year peaks. Our technical forecast for the Dollar Index nonetheless warns of downside risks, and further Dow surges could indeed sink the safe-haven US currency.

Forex Correlations Summary
View forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US Two-Year Treasury Yields, and Spot Gold prices.

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The next several days of price action will likely prove pivotal, as critical economic event risk promises sharp moves across currencies and broader financial markets.

By David Rodriguez, Quantitative Strategist, DailyFX

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