U.S. Stock Market Drives the FX Price Action

The USD keeps falling across the dashboard as the stock market’s bid tone continues. With both the Dow Jones and the S&P500 close to making new all-time highs, the USD’s offered tone is likely to continue this week.

Summer trading conditions are often responsible for such tight correlations. The USD is offered against the EUR, AUD, CAD, GBP, NZD, and even against the JPY. The USD swap lines made available by the Fed at the start of the financial crisis and kept open ever since, are a reminder to the investing community that there are plenty of USD available. As such, the dovish tone behind the USD has a sound explanation.

The strong interest in the stock market is also responsible for the flight out of the USD. The central banks’ actions during the coronavirus crisis led to lower yields across the curve. Investors looking for yield fled the fixed income and began bidding for stocks.

Fractional shares investing led to another wave of stock market participants. Retail traders can invest any amount in the stock market, even though they cannot buy one full share. Fractional shares investing makes it possible for retail traders with small accounts to participate in the price action of companies like Amazon or Tesla.

The fiscal stimulus in the United States also created a strong interest in the stock market. Americans received $600 weekly checks, and many of them used the new funds to open a brokerage account and trade financial markets.

The stock market is a leading indicator of the business cycle theory. If it signals the bottoming of the US economy, then the bid higher is likely to keep influencing the USD moving forward.

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