Nifty and Dollar-index relationship

Reference: financial chronicle

"Rising dollar index is  a factor that leads to correction in the market"

The inverse relationship between the international dollar index and Indian equities market benchmark indices, which had weakened considerably in the first half of this financial year, has once again got restored in the past five months between July and November. (see chart in left-side block)

Since July 1, and till November 30, the correlation between dollar index and S&P CNX Nifty stood firm at -0.92, which means for every one per cent rise in dollar index, Nifty fell 0.92 per cent and for every one per cent rise in Nifty, dollar index fell 0.92 per cent.

In the first half of the year from January to June, however, there was almost no relationship between dollar index and Nifty, as the correlation was a positive 0.01, which means either side movement of dollar index had failed to influence domestic market during January to June 2010.

An FCRB analysis on past several six-month periods showed that Nifty has attained such a high inverse relationship with dollar index has occurred after two and a half years.

During the half-year ended December 2007, the dollar index and Nifty held same correlation at -0.92.

Since then, the correlation between the two kept on declining until first half of this calendar year, when this relationship totally broke for a short period. During Jan-June 2008 period, the relationship was similarly broken when there was a positive 0.67 correlation between the two.

The dollar index is a measure of the US dollar relative to six global currencies —euro, yen, pound sterling, Canadian dollar, Swedish krona and Swiss franc. It appreciates when the dollar strengthens against these currencies.