Leading Indicator of a Strong Dollar Trend: The "Resonance Pattern" Among U.S. Stocks, U.S. Bonds, and the Dollar Index

Morgan Stanley's latest research points out that when the S&P 500, U.S. Treasury yields, and the U.S. Dollar Index experience extreme "resonance," it often signals that the strong U.S. dollar cycle is about to reverse.

On October 20, according to WindChaser Trading Desk, Morgan Stanley said in its latest research report that when the S&P 500 Index, the Dollar Index, and the 10-year U.S. Treasury yield experience extreme "resonance," the U.S. dollar usually follows a predictable pattern over the next six months.

Strategists including Molly Nickolin from the bank pointed out that by analyzing trading days over the past 25 years where the S&P 500 Index, 10-year U.S. Treasury yield, and U.S. Dollar Index all had extreme moves (exceeding 1.25 standard deviations) simultaneously, they found two strong signals clearly indicating U.S. dollar weakness in the following six months.

The bank said historical data shows that after the "Goldilocks" scenario (the stock market surges over 1.25 standard deviations, while the dollar and yields both drop more than 1.25 standard deviations), as well as after the “All Rising” scenario (S&P 500 Index, Dollar Index, and 10-year yield all rise more than 1.25 standard deviations), shorting the dollar yields obvious returns.

Morgan Stanley emphasized that in the "Goldilocks" scenario, the pound’s strong performance may reflect a soft landing expectation; while after the “All Rising” scenario, the Australian dollar’s lead may hint at a fading of the U.S. exceptionalism narrative and a global economic catch-up.

Notably, 2025 has already seen several trading days matching these signals, representing about 7% of the historical total, indicating that current market volatility is at historic highs.

“Goldilocks” Scenario: The Most Reliable Signal for Shorting the Dollar

The Morgan Stanley team defines a standard deviation exceeding ±1.25 as an "extra-large" move, calculated using a 10-year rolling window. Among the eight possible combinations of the three major indicators (S&P 500, Dollar Index, and 10-year Treasury yield), the “Goldilocks” scenario is the most prominent.

The specific characteristics of this combination are: S&P 500 Index standard deviation ≥ +1.25, Dollar Index standard deviation ≤ -1.25, 10-year U.S. Treasury yield standard deviation ≤ -1.25. In the past 25 years, this combination has occurred 12 times, leading the Dollar Index to fall by an average of 3.3% within six months.

Statistical testing shows the t-statistic for this signal is -2.8, with a p-value of about 0.02, indicating a strong causal relationship between this combination and U.S. dollar weakness. In terms of hit rate, after 12 occurrences, 83% of the time the dollar weakened within six months, far higher than other combinations.

Morgan Stanley says historical data shows that after the "Goldilocks" scenario, going long GBP/USD produces the best returns.

This may be because the signal suggests a "soft landing" scenario — the rise in U.S. stocks reflects economic resilience, but the decline in the dollar and yields signals expectations of Fed policy easing, which favors developed market currencies such as the pound.

“All Rising” Scenario: The Second Most Reliable Signal for Shorting the Dollar

The “All Rising” scenario refers to the S&P 500 Index, Dollar Index, and 10-year U.S. Treasury yield all rising over 1.25 standard deviations simultaneously. This combination has occurred 26 times in the past 25 years, about twice as frequently as the “Goldilocks” scenario.

Although it occurs more frequently, the reliability of this scenario is slightly weaker. Data shows that in the six months after the “All Rising” scenario, the Dollar Index fell an average of 2.7%, with a t-statistic of -2.0 (p-value about 0.06), suggesting a moderate degree of evidence supporting subsequent dollar weakness.

The strategy’s success rate is 73% — in 19 out of 26 occurrences, the dollar fell in the following six months. From the perspective of currency pairs, AUD/USD outperformed best after the “All Rising” scenario.

Research suggests this may reflect the phase of global economic catch-up following "U.S. exceptionalism":

When all three indicators rise sharply together, it often signals extremely strong performance in the U.S. economy and markets, but afterwards other regions’ economies begin to recover, closing the gap with the U.S., causing the dollar to give back its gains.

Morgan Stanley says that as a typical risk currency and commodity currency, the Australian dollar tends to perform strongly during phases of global economic synchronous recovery.

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