Want a solid grasp of inter-market relationships in 10 seconds? Here it is:
Just follow the S&P 500 Chart, in whatever time frame you trade or invest.
A Brief Explanation
  • Most asset markets follow the moves of global stocks, either moving in the same or opposite direction, but deriving that direction from global equities. That’s because equities are the best overall picture of global risk appetite (so much so that the movements of global stocks and risk appetite are virtually one and the same)
  • The S&P 500, as the most representative index of the US stock market, still the world’s single largest stock market, is the one chart that best summarizes the prevailing sentiment, be it positive (aka risk appetite or optimism) or negative (aka risk aversion or pessimism).
  • In general, in the short term the S&P 500 also drives the direction of currency value, especially that of the most liquid one of all, the USD. In sum, it is truly the One Chart to Rule Them All (yes, yes, of course there are exceptions, qualifications etc. Please, I’m trying to keep this simple for the lay-traders).
  • Many commentators wrongly believe the opposite, that a weak USD drives stocks higher, due to cheaper US exports and inflated US multinational earnings from foreign revenues, and a strong dollar drags them lower. By the same logic underpinning this belief, European and Asian stocks should behave in the opposite manner, as a weak USD hurts their exports and earnings. In fact European and Asian stock markets move in the same direction as the S&P 500 relative to the USD. That is, when they rise, the USD falls, and vice versa. So what is the real relationship between the USD and stocks?
  • Risk appetite/optimism about economic recovery and growth is best reflected in stocks. When there is optimism, i.e. rising stock markets, that causes traders to buy higher yielding currencies and sell/borrow the low yield USD (and a few others, but especially the USD) to fund these purchases at low interest, hoping to profit on the interest rate differential. In effect they are "shorting" the USD. When fear–aka risk aversion–rises, traders unwind these trades and buy back the USD, causing the USD to rise like a shorted stock. THUS STOCKS USUALLY DRIVE THE USD AND OTHER FOREX PAIRS, NOT VICE VERSA
The One Chart That Rules Them All Rules the USD Too-Though Many US Stock Commentators Don’t Get It
In other words: Equities Generally Drive the USD and Other Currencies , Not Vice Versa.

Many US stock pundits still don’t get it. Many believe the USD is a primary cause of movements in the S&P 500 and other major stock indexes.

For example, look at the US stock market summary of the November 25th US stock market action published on Yahoo! Finance from Briefing.com, which opened with the following statements.

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