JPMorgan Chase (NYSE: JPM) analysts are noting a shift in the relationship between the U.S. dollar and global equities, suggesting the greenback may no longer serve as a strong diversifier for stock portfolios.
In a recent note to clients, the bank highlighted a growing—though still modest—positive correlation between the weekly returns of the U.S. Dollar Index and the MSCI World Local Index.
On the correlation scale from -1 to +1, a positive value means the assets tend to move in the same direction. Historically, the dollar and equities have often shown negative correlations, particularly in the post-pandemic years. But this year, the correlation has moved closer to zero, according to the team led by strategist Nikolaos Panigirtzoglou.
“This move toward zero or slightly positive correlation appears to be more of a return to normal than a sign of a new market regime,” the analysts noted. They added that periods of positive correlation have occurred sporadically since the 1980s.
While the shift may suggest that the dollar is currently offering less diversification for equity investors, JPMorgan stressed that the degree of correlation is just as important as the direction. With the current levels near zero or slightly above, the impact on the volatility of an unhedged U.S. equity portfolio remains minimal.
In theory, a reduced diversification benefit could put some pressure on the dollar over time. However, JPMorgan pointed out there’s little historical evidence that changes in dollar-equity correlation have significantly affected the dollar’s performance.
“One reason could be that currency hedging decisions in equity portfolios are complex,” the analysts wrote. “Unless the correlation becomes persistently and meaningfully positive—such as in the 0.2 to 0.4 range seen from the mid-1980s to 2007—currency hedging is unlikely to result in a sustained reduction in portfolio volatility.”
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