The most influential stock market indicator these days isn t a stock at all, but the U.S. Dollar Index, which tracks the value of the dollar against a basket of foreign currencies, primarily the euro, yen and British pound.

Right now, the U.S. stock market (as measured by the Russell 3000 Index) shows a -0.63 correlation to the U.S. Dollar, meaning a rise in equities is very likely to be accompanied by a drop in the value of the dollar and vice versa.

Source: Bloomberg, Rosewood Research

The Correlation Between the Dow and Dollar

That inverted relationship is easily visible when plotting the S&P 500 against PowerShares U.S. Dollar Bullish ETF, an exchange-traded fund which tracks the dollar less expenses, and it has become even more pronounced than it was when we first noted it last year. Stocks decline and the dollar rises. Stocks strengthen and the dollar drops the greenback is down about 12% since June.

PowerShares US Dollar Bullish ETF (UUP) vs. S&P 500 -- 6 months

A Mirror Image

Many of the best performing stocks of late are the multinationals that specifically benefit from weaker greenback, such as McDonald's, profiled in this space over the summer and now at an all-time-high.

It hasn t always been this way. The 1990s bull market in stocks was accompanied by a sustained rise in the Dollar Index, which jumped approximately 40% from 1995 to 2000. Money flooded to U.S. shores, markets and investment opportunities.

As we pointed out last week, fund flows suggest just the opposite is now occurring, with investors exiting domestic options. The fact that the Japanese yenaccessible via CurrencyShares Japanese Yen), the Australian Dollar (tradable via CurrencyShares Australian Dollar) and Swiss Franc (available through CurrencyShares Swiss Franc) are all carving new multi-year or all-time highs, it s hard to see a reversal for the dollar anytime soon.

For years, investors have bought gold, commodities and foreign currencies as a hedge. But given that any strength in commodities now tends to be accompanied by a move higher for stocks (and drop in the value of the dollar), you might consider the greenback itself, as tracked by the PowerShares US Dollar Bullish ETF, to be an even more effective portfolio shield. If stocks get chopped, chances are the dollar is likely to jump.

At the time of writing, Hoenig s fund held positions mentioned in the article.