With and Without Forex

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I was thinking today about how the FOREX has been pretty much the one and only reason the equity markets have been rallying since early July (specifically, the weakness of the US dollar). It occurred to me that the dollar was actually quite strong from December 2009 through April 2010, and the equity markets were pushing higher most of the time then.

In other words, equity markets were so strong in late 2009 and most of the first four months that they were able to overcome a strong dollar. Yet the recent strength – which is similar in intensity to what we saw in the aforementioned phase – has not had to fight a strong dollar, and it has had a weak dollar aiding it. If the FOREX market were otherwise flat, I think equity markets would be much weaker now.

Just for fun, I decided to think of a graph that might incorporate these two factors, and I came up with (SPY*FXE), which simply multiplies the S&P 500 ETF with the EUR/USD ETF. The resulting graph is, to me, pretty interesting: