Interest Rates And The U.S. Dollar by John J. Murphy
Veteran technician and leading proponent of intermarket analysis John Murphy continues to delve into the interrelationships between markets, this time between interest rates and the U.S. dollar.
Previously, I have focused on intermarket linkages between commodities, bonds and stocks. The U.S
dollar also plays an important role in the intermarket chain. The dollar, for example, is affected by
movements in interest rate futures. The dollar, in turn, influences the direction of other markets such as
gold, the CRB index, bonds and ultimately the stock market. Here, I will examine the close relationship
between the dollar and interest rate futures.
THE DOLLAR'S UPS AND DOWNS
The dollar is influenced by the direction of interest rates. During a period of economic strength, the
Federal Reserve pushes interest rates higher, which in turn strengthens the dollar. In recent history, we
have seen an extended period of Fed easing to stimulate a weak economy . When the Federal Reserve
lowers interest rates, the dollar weakens. Shifts in Fed policy can be seen primarily in the direction of
short-term rates, such as Treasury bills. Figure 1 shows the inverse relationship between Treasury bill
futures and the U.S. Dollar Index from late 1987 to mid-1992.