Yen may be the key to the Japanese stock market

So far, the yen may be the key to the Japanese stock market, but the U.S. dollar
is not the key to U.S. stocks — although the time may come when it will
pay to be aware of the long-term trend away from U.S. leadership in global equity markets and the threat of diversification. However, look at the euro/dollar pair (EUR/USD) and the S&P 500. In this case the currency that is rising alongside the U.S. stock index is the euro, which makes no sense at all.

There is no logical universe in which a dollar-based stock index would rise
because the dollar is falling. Your statistics professor was right when he said on the first day of class, “Correlation is not causation.” An inverted dollar/euro shows in recent years the S&P is rising despite the dollar falling (Figure 5). We seem to see the two move in tandem from 1999 (when the euro came into existence) to 2003, but since then, they have moved inversely.

Does that mean the U.S. stock market is escaping the investor-repelling effect of
the falling dollar? So far, yes. U.S. outflows to other markets and weaker
inflows to U.S. markets are still a minor side effect in the grand scheme of things.
U.S. investors will probably always have a preference to hold most of their savings at home and in their home currency. Foreign ownership of U.S. stocks tends
to be fairly stable at about 15 percent of the total market — unlike the bond market, of which foreigners own more than half.

If foreigners reduce their holdings of U.S. equities, they may still keep the money in dollars, moving it to bonds or direct investment, to keep a share of the world’s biggest economy. You are not a global investor if you own no piece of the U.S.