The dollar-yen exchange rate has in recent months become the most closely watched currency pair in the world.
Today, the yen is surging against the dollar.
As the chart below shows, the S&P 500 has tracked movements in the dollar-yen exchange rate pretty closely since late 2012, when it became increasingly clear that Japan was about to launch an epic monetary and fiscal stimulus program called "Abenomics."
Japan has done just that – in April, it formally announced the largest central bank bond-buying program relative to the size of its economy in history – which has caused global markets to rally in anticipation of the significant additional liquidity that will be added to financial markets as a result.
Since Japan has become the new provider of marginal liquidity to global markets, the dollar-yen exchange rate has become an essential yardstick for global market sentiment.
That's why when the dollar strengthens against the yen, the S&P 500 tends to rally. Conversely, when the dollar weakens against the yen, it typically coincides with weakness in U.S. stocks.
Business Insider/Matthew Boesler, data from Bloomberg
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