The long-standing relationship between the US dollar and US stock indices has broken down due to a restructuring of the global trade system. Much now depends on the dominant market themes. Let’s discuss it and make a trading plan for EURUSD.
The article covers the following subjects:
Major Takeaways
- The US dollar can hardly be called a safe haven.
- Correlations will return once the storm settles.
- The Supreme Court may take center stage.
- Rebounds from 1.16, 1.1545, and 1.15 are reasons to buy EURUSD.
Weekly Fundamental Forecast for Dollar
Donald Trump has broken the system. His reshaping of global trade and pressure on the Fed disrupted historical relationships. The US dollar now often rises or falls along with equities, behaving more like a risk asset than a safe haven. It's no surprise that the ongoing S&P 500 rally has deepened EURUSD's decline.
Will these long-tested correlations return? Morgan Stanley thinks so. The bank recommends selling the dollar while buying stocks in a "Goldilocks" scenario, when the economy grows at a moderate pace and inflation remains under the Fed's control. Unfortunately, that's not quite the case now. If the CPI report is released, it's expected to show higher inflation. Expectations of such an outcome are another factor driving EURUSD's decline.
Correlation Between the US Dollar, Stocks, and Bonds
Source: Bloomberg.
In my view, these correlations depend on the prevailing type of trading. In 2023–2024, the greenback often rose alongside the S&P 500 thanks to American exceptionalism. In April, however, the USD Index fell along with equities amid the "Sell America" narrative. The TACO trade tends to boost both the dollar and the broad market index, as lower tariffs are generally seen as negative for the US economy. But when trade risks fade, historical correlations tend to return: stock markets rise while non-residents hedge risks by selling the dollar.
The return of calm after US-China trade talks could restore these cross-market relationships. Still, in 2025, peace is the last thing investors can hope for. Even if Beijing and Washington reach an agreement and the shutdown fades into history, markets could face new turbulence in November when the Supreme Court reviews the tariff case. If the Court overturns them, global trade could be thrown into chaos again, reviving the "Sell America" strategy.
As for France's credit rating downgrade, I believe the political drama there is nearing its end. Moody's may follow Fitch and S&P Global Ratings on October 24 and strip the country of its last double-A rating, but the budget debate is unlikely to trigger new turmoil or widen the yield spread between French and German bonds.
France/Germany Bond Yield Trends
Source: Bloomberg.
Sébastien Lecornu's proposed budget sets the deficit at 4.7%, though he’s ready to make compromises to keep it below 5% of GDP. S&P Global Ratings expects 5.3% after 5.4% in 2024 — no real change. The euro can rest easy.
Weekly Trading Plan for EURUSD
As for the dollar, peace remains a dream. A drop in EURUSD toward the support levels at 1.16, 1.1545, and 1.15, followed by a rebound, could offer buying opportunities.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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