Dollar Not Following Stocks and Gold Down - TheStreet

There was a breakdown on Wall Street early Tuesday, and I'm not (just) talking about the latest slide in equities. Rather, it was the breakdown of what had been a tight symbiotic relationship between the dollar and equities, and the counterbalance between equities and gold.

As of 2:05 p.m. EDT, the

Dow Jones Industrial Average

was down 0.4% to 9070.68 after having traded as low as 8960.54. The

S&P 500

was down 1.3% to 955.75 vs. its earlier low of 946.41, just a hair above its Sept. 21 intraday low of 944.75.

After having violated its Sept. 21 intraday low of 1387.06 and threatening to break its Oct. 9, 1998 intraday low of 1357.09, the

Nasdaq Composite

was recently down 2.1% to 1374.8 vs. its earlier low of 1358.49.

The latest selloff in stocks was caused by now-familiar issues such as accounting concerns at companies such as

Cardinal Health

(CAH) - Get Report

and

Elan

(ELN)

, as well as ongoing worries about

the fallout from

WorldCom's

(WCOME)

scandal. A bond default by WorldCom could cost managers of collateralized debt obligations -- mainly banks -- as much as $500 million,

Bloomberg

reported, citing a study by Standard & Poor's.

Additionally, in a week in which many participants are absent, trading desks were trying to absorb the $4.6 billion IPO of

CIT Group

(CIT) - Get Report

, which was recently down 2.5% to $22.42 vs. last night's offering price of $23.

But while equities were reeling, the dollar was rebounding, reaching a five-day high vs. the euro, which suffered from a weaker-than-expected report on consumer and business confidence in the Eurozone. The euro was recently trading at 98.41 cents vs. its intraday high of 99.88 cents on Friday. The greenback was also advancing vs. the yen, lately trading at 120.07 yen. The Dollar Index, which on Friday managed to hold above key technical support at 105, was lately up 0.5% to 107.5.

"What's happening here is equities are gathering momentum to the downside and the currency on the other hand seems to have gotten vastly oversold," said David Horner, senior financial economist at Merrill Lynch. "I think you're having a bounce

in the dollar as people realize the situation in Europe is not at all better" than the one here.

Still, there is a relationship between the currency pulling back and the stock market's decline because foreigners are selling U.S. assets and there's "not a comparable selling of foreign assets by U.S. investors" to offset it, Horner said. "There's a disconnect happening

between the dollar and stocks but it doesn't have to hold up every day or every week" to exist.

In retrospect, the breakdown of what had been a very symbiotic relationship between the dollar and U.S. equities began Friday, thanks -- in part -- to

joint intervention by the world's central bankers to support the dollar and stem the yen's ascent. Despite the rout in equities

Monday, the dollar rallied on the backs of a stronger-than-expected manufacturing report.

The dollar's recent strength -- even should it prove a temporary reprieve -- explains the inability of gold and related stocks to benefit from the ongoing weakness in equities. Of late, gold was up $2.35 to $314.45 per ounce while the Philadelphia Stock Exchange Gold & Silver Index was down 5.1%.

Most observers agree there's a direct connection between trends in gold and the dollar, although Horner suggested gold is "just a commodity." Many others have questioned the seemingly dramatic connection between equities and the greenback. Although they have moved in tandem this year, and definitively so in the past two months, Lara Rhame, currency strategist at Brown Brothers Harriman, said the trend was mostly coincidental.

"I think they broadly follow the same trends, but I don't think you can superimpose" one on the other, Rhame said. "There's a lot of moving parts in the currency market, and you can't just look at stocks in a vacuum."

The recent weakness in the dollar was largely due to a "lack of broad interest" among international investors in U.S. assets, rather than a mindset "there's a new paradigm" in which Europe is going to attract the bulk of international capital, she said. Therefore, "the euro moved too far, too fast last week," and now we're "seeing consolidation" of that move.

Meanwhile, unless a company is a pure exporter "I couldn't imagine saying 'sell

XYZ because of the dollar,'" Rhame continued. Noting that most U.S. stocks are still owned by Americans and that managing currency risk is relatively cheap, the dollar "shouldn't be an issue" to stock traders, she suggested.

Of course, if there's a perception that the dollar is hampering the stock market (or vice versa) that can impact trading, and that's certainly been the prevailing mindset in recent weeks. Furthermore, Rhame didn't dispute the idea that a precipitous fall in the dollar would have a damaging effect on U.S. stocks, nor does she believe the recent strength in the greenback is going to be long-lived.

Meanwhile, those who've been recently declaring how much a weaker dollar benefits certain stocks and the economy must now face the ultimate conundrum: How can both a strong dollar and a weak dollar be good for stocks and the economy?

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.