Stock shocks and the dollar

We human beings learn throughout the course of our lifetimes — despite what you may think after taking a look around the room at your compatriots.

Traders learn, too, which might seem even more incredible. Without delving too much into various forms of educational psychology, most of which are best used to wrap fish, it is our negative experiences that influence us most. To summarize the single article that has ever been written — and recycled endlessly — about trader psychology, the pain of loss is about three times the intensity of the pleasure of gain.

Those old enough to recall the October 1987 stock market crash remember how bonds, which had hit their low for the year on the morning of Oct. 19, 1987 and had rallied only somewhat during the remainder of that day, went up by their three point limit for the next three trading days. The memory of that association has been so strong that each and every hiccup in the stock market since has been accompanied by short-covering in bonds.

The Federal Reserve, which had been supporting the dollar via higher short-term interest rates, reversed its stance immediately after the 1987 crash — and the dollar declined into early 1988 in response. A similar downturn in the greenback occurred after the Federal Reserve began to drive interest rates lower in response to the 2001-2002 bear market.

Is there a knee-jerk association between stock market downturns and the course of the dollar? Also, just to keep the question symmetric, are there similar reactions to large rallies in stocks?