The Positive Relationship Between Short Term Rates and the Dollar Index

Mar 13, 2010: 7:36 PM CST

I wanted to highlight a few quick recent charts of how the US Dollar Index positively correlates (moves in the same direction) with the 3-month Treasury Bill Discount Rate.

It’s not the most fascinating topic, but it’s definitely important to know of this relationship, so let’s take a look at a couple of recent charts.

First, a ‘zoomed in’ view of the recent action:

You can view this comparison in StockCharts with symbols:

$IRX for the 3-month T-Bill Discount Rate (short-term)

$USD (US Dollar Index – a basket of 6 FOREX pairs)

What’s interesting is that – relatively – the indexes move almost in lock-step with each other, which makes sense.

While this isn’t the “Fed Funds Rate,” in general higher rates translate into a more attractive (expensive) currency, and lower rates translate into a weaker currency for a country.

We’re seeing this in the recent charts of short-term Treasury Yields and the Dollar Index as expected.

This is in line with talk of the Fed “eventually” (at some point in the future) raising the Fed Funds Rate… but that is an entirely separate discussion.

Let’s step the chart back to see the one-year comparison in yields and the Dollar Index:

In both charts, the US Dollar Index – green – is scaled on the left side of the chart while the 3-month T-Bill Discount Rate is scaled – in percentage terms – on the right side.

Thus the current 1.4 value corresponds with 1.4%.

The 3-month T-Bill Rate – and shortly after the Dollar Index – bottomed at the end of 2009 to give us the current simultaneous rallies we’re seeing.

I wanted to call this to your attention as an interesting comparison and method to sharpen your inter-market analysis skills.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

2 Comments

2 Responses to “The Positive Relationship Between Short Term Rates and the Dollar Index”

  1. TheYenGuy Says:

    The charts presented indicate that a rising 3 month rate will bring a higher dollar … but a new dynamic is at work: A Dollar Carry Trade Began Taking The US Dollar Lower February 23, 2010 http://tinyurl.com/yf9cncb

    The Dollar Bull ETF UUP crested on 2-23-2010, at 23.81, indicating that the US Dollar, $USD, fell February 23, 2010.

    A “dollar carry trade” developed February 23, 2010, with the dollar being sold short and the following currencies be held long:
    South African Rand, SZR, +6%
    Brazilian Real, BZF, +4%
    Canadian Dollar, FXC, +4%
    Austrlian Dollar, FXA, +3%
    Mexican Peso, FXM, +3%
    Russian Ruble, XRU, +3%
    New Zealand Dollar, BNZ, +2%
    Swiss Krona, FXF, +2%
    Euro, FXE, +2%

    The MSN Currency Chart shows the dollar carry trade that developed February 23, 2010 http://tinyurl.com/y8hb4cu

    The chart of the US Dollar, $USD, shows the fall in the US Dollar which finally came, that is finally manifested from the carry trade, the week ending March 12, 2010, as the US Dollar fell 1%.

    The chart of the long term US Treasury Bonds, TLT, shows the market for long term US government bonds broke down February 10, 2010: it's hasta-la-vista-baby to invesment principle in these bonds.

    It's not wise to own any dollar denominated investment, anywhere, whether it is in a brokerage account or a money market account, as the China holds huge amounts of Treasuries in its banks and on reserve with the Fed; and it holds huge amounts of Forex reserves which could send the US Dollar into the cellar. The safehaven investment is gold in the ETF GLD, in a trust account, not a brokerage account, in British Sovereign gold coins, and in a trade account at BullionVault.com

    The Assoicated Press in Sunday March 14, 2010 article China Wants US Reassurance Over Dollar reported that Chinese Premier Wen Jiabao in his annual press conference after the closing of the National People's Congress, expressed concern about the U.S. dollar, and called on Washington to take “concrete steps” to reassure Beijing about the safety of its huge Treasury bond holdings.

    “Any fluctuation in the value of the U.S. currency is a big concern for us,” Premier Wen Jiabao said at a news conference.

    “We cannot afford any mistake, how slight it is, when running our financial assets,” he said. “I would like the United States to take concrete steps to reassure investors.”

    China has pressed Washington to control its yawning budget deficit and prevent inflation that would erode the value of the dollar and China's holdings.

    The premier said Treasury values were a matter of the “national credibility” of the United States.

  2. TheYenGuy Says:

    The charts presented indicate that a rising 3 month rate will bring a higher dollar … but a new dynamic is at work: A Dollar Carry Trade Began Taking The US Dollar Lower February 23, 2010 http://tinyurl.com/yf9cncb

    The Dollar Bull ETF UUP crested on 2-23-2010, at 23.81, indicating that the US Dollar, $USD, fell February 23, 2010.

    A “dollar carry trade” developed February 23, 2010, with the dollar being sold short and the following currencies be held long:
    South African Rand, SZR, +6%
    Brazilian Real, BZF, +4%
    Canadian Dollar, FXC, +4%
    Austrlian Dollar, FXA, +3%
    Mexican Peso, FXM, +3%
    Russian Ruble, XRU, +3%
    New Zealand Dollar, BNZ, +2%
    Swiss Krona, FXF, +2%
    Euro, FXE, +2%

    The MSN Currency Chart shows the dollar carry trade that developed February 23, 2010 http://tinyurl.com/y8hb4cu

    The chart of the US Dollar, $USD, shows the fall in the US Dollar which finally came, that is finally manifested from the carry trade, the week ending March 12, 2010, as the US Dollar fell 1%.

    The chart of the long term US Treasury Bonds, TLT, shows the market for long term US government bonds broke down February 10, 2010: it's hasta-la-vista-baby to invesment principle in these bonds.

    It's not wise to own any dollar denominated investment, anywhere, whether it is in a brokerage account or a money market account, as the China holds huge amounts of Treasuries in its banks and on reserve with the Fed; and it holds huge amounts of Forex reserves which could send the US Dollar into the cellar. The safehaven investment is gold in the ETF GLD, in a trust account, not a brokerage account, in British Sovereign gold coins, and in a trade account at BullionVault.com

    The Assoicated Press in Sunday March 14, 2010 article China Wants US Reassurance Over Dollar reported that Chinese Premier Wen Jiabao in his annual press conference after the closing of the National People's Congress, expressed concern about the U.S. dollar, and called on Washington to take “concrete steps” to reassure Beijing about the safety of its huge Treasury bond holdings.

    “Any fluctuation in the value of the U.S. currency is a big concern for us,” Premier Wen Jiabao said at a news conference.

    “We cannot afford any mistake, how slight it is, when running our financial assets,” he said. “I would like the United States to take concrete steps to reassure investors.”

    China has pressed Washington to control its yawning budget deficit and prevent inflation that would erode the value of the dollar and China's holdings.

    The premier said Treasury values were a matter of the “national credibility” of the United States.