JPMorgan Chase (NYSE: JPM) analysts are observing a shift in the relationship between the U.S. dollar and global equity markets, suggesting the dollar may no longer offer the same level of diversification benefits for investment portfolios.

In a recent client note, the bank highlighted a modest but increasing correlation between weekly returns of the U.S. Dollar Index and the MSCI World Local Index.

On a correlation scale from -1 to +1, a positive value indicates that two assets tend to move in the same direction. Historically, the dollar and equities have typically shown negative correlations, particularly in the post-pandemic period. However, according to the team led by strategist Nikolaos Panigirtzoglou, that relationship has shifted closer to zero this year.

“This movement toward zero or slightly positive correlation appears to reflect a return to normal rather than a structural shift in market behavior,” the analysts wrote, noting that similar periods of positive correlation have occurred sporadically since the 1980s.

Although this trend may suggest that the dollar is currently providing less diversification relative to equities, JPMorgan emphasized that both the direction and the magnitude of the correlation matter. At near-zero or mildly positive levels, the impact on the volatility of an unhedged U.S. equity portfolio remains limited.

In theory, this reduced diversification could eventually weigh on the dollar. However, the analysts noted there is little historical evidence that changes in dollar-equity correlations have significantly affected the dollar’s overall performance.

“One possible explanation is that the decision to hedge currency risk in an equity portfolio is complex,” they wrote. “Unless the correlation becomes persistently and meaningfully positive—such as in the 0.2 to 0.4 range seen from the mid-1980s to 2007—currency hedging is unlikely to provide a substantial or lasting reduction in overall portfolio volatility.”

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