The relationship between currencies and stock markets

In short, it’s very, very difficult to untangle the relationship between currencies
and stock markets. Even the most plausible-sounding press reports are simply not to be trusted. The current version of the currency-stock market story has it that:

• The U.S. dollar has been falling against the benchmark
euro since October 2000, siphoning capital away from
U.S. stocks.
• Returns to investors are unfairly distributed to dollarholders:

Since the dollar started falling in 2000, the MSCI World ex-USA index has gained 32 percent in dollar terms but lost 19.2 percent in euro terms. The MSCI U.S. index is up 7 percent in dollars and down 35 percent in euros. This imbalance should be rectified. It’s an industry joke that the word “should” should always be put in quotation marks when used in a financial context — and often in economics, too. To say that some event should occur to achieve fairness is to dream of a world that does not exist and never did.

Financial market outcomes aren’t always fair, and unfair situations persist for long periods. Sometimes a disequilibrium delivers a come comeuppance to some party we dislike, but it’s not realistic to count on it. To look at the U.S. dollar and stock markets, let’s start with the Chinese shock. Twice in the past three months, the Shanghai Composite Index (SCI) has tanked. Critics of the Chinese stock market rudely say it is little more than a gambling den — a stock listed on it goes up even when a company reports bad earnings, or fails to report at all.