By Erin McCarthy Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--With the dollar soaring and gold plummeting in recent days, the inverse correlation between the two--a mainstay theory in currency trading--could be on the mend after it proved an unreliable trading tool in the past few months' volatile markets. For now it's too early to ascertain whether the correlation has truly reasserted itself, but gold's plunge last week in concert with a rebound in the dollar offered signs of the correlation's return, some traders and analysts say. Gold and the dollar are often expected to move inversely, with gold rising in the face of a weak dollar, and vice versa. That's because gold prices, like other commodities, are denominated in dollars and because the precious metal is viewed by many investors as an alternative currency. Many see it as a store of value to hedge against inflation--that is, when the dollar's value as a source of purchasing power is eroding. That classic relationship hasn't been so clear in recent months amid extreme market volatility, market watchers say. But with the latest swings in both parts of the trade, a correlation that pits a stronger dollar versus a weaker gold correlation is coming back into play, said Phil Streible, senior market strategist at MF Global. A strong inverse correlation is typically seen around negative 75%, said Jay Govender, chief North American technical strategist at Barclays Capital. The gold-dollar correlation has been "whipsawing" between around the positive and negative 50%-areas in recent months, making it an unreliable indicator for trading, he said. On Monday, however, gold and the dollar's 21-day rolling correlation was at negative 58%, compared with 0% last Wednesday, he said. "What we're seeing is this inverse correlation is starting to take hold yet again," Govender said. But he warns for traders to use the correlation as a guide, it would need to return closer to the negative 75% level and stay around there consistently, he said. Market watchers also point out that gold's steep fall from all-time highs hit earlier this month is due to many more factors beyond the dollar's gains. Last week, investors unwound what had been some extremely heavy positioning in the precious metal. Rather than run to gold as a safe haven in the recent bout of market panic, investors liquidated their bigger and more profitable positions in the precious metal. In addition, on Friday Comex operator CME Group Inc. said it would raise the collateral requirements for trading in gold by 21%. Still, strategists expect that the negative correlation between the precious metal and the dollar will eventually be intact once again, especially if the dollar continues to advance in anxious markets. That may mean that gold could strengthen against the euro, but stay down against the U.S. currency, said MF Global's Streible said. -By Erin McCarthy, Dow Jones Newswires; 212-416-2712; erin.mccarthy@dowjones.com

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