How the Forex Market Can Influence Stock Indexes
Now let’s flip things around and see how the forex market can affect the stock market — specifically, stock indexes.
When people talk about how "the stock market" is doing, they’re usually referring to a stock market index — a collection of selected stocks meant to represent the overall market’s performance.
A stock index gives you a big-picture view of how a group of major companies is doing.
In this lesson, we’ll look at how currency movements can impact two well-known stock indexes:
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The Nikkei 225: Also known as the Nikkei or Nikkei Index, this tracks the performance of 225 of Japan’s largest companies listed on the Tokyo Stock Exchange (TSE).
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The Dow Jones Industrial Average (DJIA): Often just called the Dow, this represents 30 major U.S. companies traded on the New York Stock Exchange (NYSE) and NASDAQ.
The Nikkei and USD/JPY
Before the global financial crisis in 2007, the Nikkei and USD/JPY often moved in opposite directions — they were inversely correlated.
Back then, investors saw the Nikkei’s performance as a reflection of Japan’s economic strength. So, when the Nikkei went up, confidence in Japan grew, and the yen strengthened.
On the other hand, if the Nikkei dropped, the yen weakened, causing USD/JPY to rise.
But during the 2008 financial crisis, this relationship changed. Like many things during that time, it got a bit chaotic.
The Nikkei and USD/JPY started moving together instead of in opposite directions.
Surprising, right? Who would’ve thought that stock indexes and currency pairs could be so connected?
The Dow and USD/JPY
Now let’s look at the relationship between the Dow and USD/JPY.
In general, a strong or weak U.S. dollar affects the performance of large U.S. multinational companies — the kind that make up a big part of the Dow.
When the dollar strengthens, it becomes harder for these companies to compete globally. Their products become more expensive for foreign buyers, which can hurt sales and profits.
So, logically, you might expect a close correlation between the USD/JPY and the Dow.
But in reality, the connection is only mild.
Take a look at the chart (not shown here). The Dow hit a peak of 14,000 in late 2007 before plunging during the 2008 crisis.
USD/JPY also fell during that period — but not as dramatically.
This example shows us a key lesson: don’t rely on correlations alone.
Markets are complex, and relationships between currencies and stocks can shift due to fundamentals, technicals, or sentiment. So always do your research and stay informed — correlations can be helpful, but they’re not foolproof!