Impact of US Dollar and Treasuries on the US Stock Market

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If you are in the US stock market with a short-term trading objective, it is relevant to know the degree of correlation of the US Dollar market and the US Treasuries market with the US stock market as represented by the Dow Jones Industrial Average (DJI). Note:We use DJI as the reference Index instead of the SP500 or the Nasdaq because it’s all about Trump’s tariffs now and tariffs are on Goods, not Services. And on Manufacturing, not IT Technology.

Ticker Symbols

Output variable-DJI: Dow Jones Industrial Average

Input variables

DXY: US Dollar Index

SHY: iShares 1 to 3 year Treasuries ETF

IEF iShares 7 to 10 year Treasuries ETF

TLT: iShares >20 years] Treasuries ETF

The chart above shows the performance of all the variables. The variables have been standardized/normalized by transforming into Z-Score.

So, we need to see the degree of correlation between the input variables and the DJI. We use the simple Pearson’s Coefficient of Correlation R because  our data series only consists of 90 data points from 2 Jan 2025 , and the short-term inter-relationships between financial market variables is mostly linear. 

Explaining the Table below

Pearson Correlation Coefficient R can be from -1 to 1. Negative values indicate an inverse relationship. Zero= no correlation: 1 or -1 = 100% correlation.

Thus, from the table:

·       USD (DXY) has a high positive R of 0.79. i.e. the higher the USD the higher the DJI

·       Of all the input variables DXY has the highest R.  

·       SHY and IEF Treasuries (T) also known as Bonds have a negative R  i.e. the lower the price of T, the higher the DJI. 

* But the current negative correlation between bonds and stocks is unusual. Usually when bond prices rise, stocks also rise because rising bond prices means lower bond yields so investors look to the stock market for higher yield. It could be due to the risk aspect on all assets denominated in USD

·       We also note that the shorter the tenure of the Treasuries the higher the impact on stocks, i.e. SHY has R=-0.79 while IEF has R=-0.57

·       Long term Treasuries like TLT has insignificant impact on DJI

 

Visualization of Table














 

Implication of analysis

Pay more attention to changes in the USD. If US Tariffs on trade result in less demand for the USD (because you don’t need to buy US things) , the USD will fall, and any rise in the stock market is unsustainable. Also, when USD falls, there will be less demand for US Treasuries since if the downward trend of USD is due to fundamental factors, then holding US Treasuries denominated in USD bears a higher risk.   Therefore, pay attention to the price of short term Treasuries as represented by price of SHY and IEF.  


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