By: John Kicklighter, Head of Market Research
In recent weeks, the U.S. Dollar and the S&P 500 have exhibited an unusually strong positive correlation—a departure from the presumed thematic relationship between these two benchmark indicators. Traditionally, according to StoneX’s Head of Global Content John Kicklighter, the S&P 500 reflects investor confidence and risk appetite, while the Dollar tends to act as a safe haven during periods of market instability. That relationship would insinuate that the two would move in opposition to each other. This divergence from the norm can speak to a fundamental interest for analysts and investors: what is driving the markets ?
Chart of S&P 500 and DXY Dollar Index with 20-Day Correlation (Daily)
Source: TradingView
Historically, the S&P 500 and the Dollar don’t move in lockstep. In risk-on environments, equity markets often rally as investors seek higher returns, while the Dollar weakens as capital flows to higher-yielding or riskier international assets. Conversely, during intense risk-off periods, the Dollar strengthens as global investors seek safety, while equities typically sell off. This traditional risk spectrum behavior is important to understand, but it is also important to acknowledge that such ideal and extreme circumstances are not the norm.
The recent positive correlation suggests other drivers could now be influencing the dynamic. Kicklighter believes that, overall, risk appetite isn’t often leaning towards the extremes – greed and fear – of the aforementioned spectrum. Other factors then must come into play, such as carry trade and the relative growth of the US vs other countries.
“There are shifts in this sentiment as with during the last rate cycle. The Dollar has been earlier and higher on the relative interest rate spectrum, turning the Dollar into a ‘carry currency’ but risk appetite dropped in 2022 when the Fed was tightening,” says Kicklighter. “Over a longer period of time the relationship between SPX and USD is statistically robust.” These observations are backed by StoneX Market Intelligence’s 20yr and 5yr correlation heat maps.
Heatmap of Market Correlations Over Past 20 Years
Source: John Kicklighter, Market Intelligence
More recently, a fresh layer of complexity has emerged from rising trade tensions. The U.S. administration’s increasingly protectionist stance—evidenced by newly proposed tariffs—has rattled global markets and triggered both a recent bout of general risk aversion along with a “flight from the US,” Kicklighter says. In response, foreign investors have begun to reduce exposure to U.S. assets, which resulted in a weakening the Dollar even as the S&P 500 ran through a correction last month. This divergence has been exacerbated by lingering uncertainty around U.S. policy, including the more recent fallout from Moody’s downgrade of the U.S. sovereign credit rating last week.
While the White House’s delay of full tariff implementation helped reignite risk appetite and lift equity markets, the same reprieve hasn’t translated into a sustained rebound for the Dollar. Foreign capital remains cautious, reflecting deeper concerns about the consistency and predictability of U.S. policy-making.
In summary, while the Dollar and the S&P 500 may not always move in tandem, their recent positive correlation is underpinned by a confluence of factors—ranging from carry trade dynamics and relative growth expectations to geopolitical uncertainty and shifting risk sentiment. Understanding this interplay is essential for investors navigating today’s complex macro landscape.
Heatmap of Market Correlations Over Past 5 Years
Source: John Kicklighter, Market Intelligence
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---- Expert: John Kicklighter, Head of Global Content, StoneX
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