USD, The Confetti In Wallets After QE 2.

Forget about fundamentals or technicals: just follow the bouncing buck.

Strategists emphasize that a new theme has emerged in the investment markets, which is that the risk-on/risk-off trade is taking its cue increasingly from the US dollar. The correlations, market pros say, are high, intensifying, and actually now unprecedented.

For example, according to Gluskin Sheff’s David Rosenberg, over the past two months, 90% of the time that the dollar moved in one direction, the S&P 500 moved in the other. The inverse correlation, over the same time period between the dollar and emerging market equities, was 92%; it’s now running at 95% for the CRB index.

Interesting positive correlations are also now firming dramatically. For instance, over the past two months, the dollar and corporate spreads moved in the same direction 80% of the time. The dollar and the VIX, which tracks expected volatility in the stock market, moved in the same direction 80% of the time.

In other words, ignore the politics, economic data and technical levels. Maybe right now all money-making traders and investors need to do is follow the dollar. It’s a simple tune whistling through the canyons of lower Manhattan: dollar down, everything else up.

“Hard to believe it’s that easy, but this seems to be the environment that Ben Bernanke have managed to create in their quest to reflate the global economy,” Rosenberg says.

Historically, say strategists, these correlations weren’t this pronounced, but that changed when the Federal Reserve began buying Treasury securities. Last week, the Fed announced that it will print another $600 billion to buy Treasuries through mid-2011. That’s in addition to the roughly $2 trillion it printed to buy Treasuries and mortgage debt during the financial crisis.

The point of the program is to keep long term interest rates low, encouraging borrowing and spending by consumers and companies. The idea, if Bernanke and his FOMC allies are right, is that yields will tumble and people will start buying homes again. Expecting greater inflation ahead, they’ll also buy more stuff at the mall. In turn, companies can start hiring and unemployment will fall.

Of course, investors also know that vastly increasing the supply of dollars means each dollar is worth less when measured against other things. So they’re concerned about the real worth of all that confetti in their wallets, and they’re looking to protect themselves by diversifying into other assets.

Since August 27, when Bernanke suggested that another round of monetary stimulus was on the way, the dollar index (DXY), a measure of the dollar against a basket of currencies, is down 8.4% Gold was up 12.5%.

“This is part of the same trade we’ve seen since March 18, 2009 when Bernanke said he was going to start buying Treasuries,” says Miller Tabak’s Peter Boockvar, as investors look to protect themselves from a lower dollar by loading up on the stocks of big exporters, emerging market equities, hard assets, and foreign currencies. “Maybe now it’s just intensified,” he says.

Critically, says S&P’s Alec Young, the point isn’t just that the Fed is printing another $600 billion, but that central bankers also left the door open to keep printing more money if necessary.

“That was a green light for the risk trade,” he says. “It means an open-ended amount of dollar printing. So the dollar is tanking and commodities, gold, bonds and stocks go up. It reinforces all those trades.”

At some point a few months from now, Young says, investors will want to see real evidence that all this monetary experimentation worked. If they don’t see the economic benefits then they could sell stocks and commodities in anticipation of another leg down. But, for now, he argues, it’s unwise to violate the first rule of Investing 101: Don’t fight the Fed.

“There could be a correction next year when people are disappointed at what this actually accomplished,” Young says. “But that’s the next trade. Right now, the Fed gets the benefit of the doubt. You could be right and all this won’t do any economic good but, in the meantime, you could also miss out on the rally.”

But, if the risk-on/risk-off trade is taking its cue increasingly from the U.S. dollar, when might that relationship fade?

That happens, says Young, when we generate a stable, self-sustaining recovery. “It breaks when the U.S. economy finally gets on its feet and doesn’t need the Fed to keep printing a ton of money,” he says. “If QE2 works then that marks some kind of bottom for the dollar.”