For a change, dollar rallies on good U.S. news

A much slower pace of U.S. job losses in July and improvement in housing and manufacturing lifted U.S. stocks on Friday, but a more surprising beneficiary of the news was the U.S. dollar.

For the last year, all investors had to do to forecast how the dollar or euro would trade was look at Wall Street. When good news boosted stocks, the euro also rose, while the dollar rallied when the market swooned.

Bad news tended to boost the dollar because investors saw it as the safest store of value at a time when economies around the globe were contracting.

And with interest rates in the United States and other developed economies at or near zero and expected to stay there, there was no yield advantage to be had in buying dollars on the occasional piece of hopeful U.S. news.

Currency investors say that state of affairs may be changing now that a string of stronger-than-expected data has investors hoping the U.S. economy will be the first developed economy to emerge from recession.

When data Friday showed employers cut far fewer jobs in July than in June, the dollar broke out of its pattern and rallied against major currencies..

"I think this could be the start of the unwinding of the inverse stocks-dollar correlation," said Greg Salvaggio, vice president at Tempus Consulting in Washington, D.C. "We've seen improvement in housing, in manufacturing output and now clearly in the job environment."

At one point this year, the correlation between the euro-dollar rate and the S&P 500 index hit 50 percent, according to BNP Paribas calculations. That is, the euro and S&P 500 rose or fell in tandem half the time.

But that has slipped in recent days to between 30 and 40 percent, and BNP Paribas strategist Sebastien Galy said the link looks likely to weaken further.

HOPE SPRINGS

Some have long argued that because the United States was quick to slash interest rates and commit trillions of dollars to rescue the economy, it would be first to recover.

At some point that's expected to put upward pressure on interest rates and boost the dollar, especially since recovery in other economies, such as the 16-country euro zone, is thought to be lagging behind the United States'.

In recent weeks, U.S. data has been starting to lend credence to such an outlook. The economy contracted by just 1 percent in the second quarter after shrinking 5.5 percent between January and March.

Improvements in the housing market, which economists argue are necessary for sustained recovery, and in factory output have also fed investor optimism.

Friday's dollar gains are "a sign that the currency markets are weaning themselves from the 'good-news-is-bad-news for the dollar' syndrome and returning to fundamental measures of economic growth and interest rate cycles," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.