Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the U.S. Dollar Rally Has Legs

Currencies / US Dollar Jan 23, 2010 - 03:13 PM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleIn December I wrote a Money and Markets column making the case for a bottom in the dollar. And since then the evidence supporting that thesis has grown. I also said there are plenty of ugly currencies out there that will likely take scrutiny away from the dollar. In fact, in recent weeks I outlined the blemishes burdening three key major liquid currencies. And those blemishes are now being exposed …


Just eight weeks ago, the pontificators were targeting a break of the all-time highs for the euro … parity for the Australian dollar … resurgence in the British pound … and a return to record highs in the yen.

But since then, the tables have turned. The dollar index has rallied 6 percent, and all of the previously favored currencies are falling!

And the euro, the second most widely held currency in the world, has fallen sharply under the weight of its own problems — losing 7.5 percent against the dollar in just eight weeks.

In short, the U.S. dollar has gone from the most hated currency in the world to one receiving remarkably little attention lately. That’s because it’s stopped declining and is now rising. Not surprisingly, price alone has exposed the lack of conviction in the dollar bear camp.

The fundamental and technical evidence points to a rebounding U.S. dollar.
The fundamental and technical evidence points to a rebounding U.S. dollar.

But even in the face of a landslide of negative sentiment and the gradual, yet steady, decline of 2009, I’ve maintained my view that the dollar is not on a path for destruction; rather the weight of fundamental and technical evidence favors the greenback.

The Fundamental Evidence …

Exhibit A: No alternatives

First, the case made for the vulnerability of the dollar falls short when it comes to naming alternatives, as I laid out in my November columns, “Weighing the Dollar Alternatives” and “Weighing the Dollar Alternatives: Part II.”

If you believe the policy responses in the U.S. to the financial crisis should cause the dollar to crater, you must ask yourself: Against what?

The emergency stimulus response has been global. And most likely ALL currencies will fall in value relative to hard, tangible assets like gold, real estate and other commodities … even financial assets like stocks and bonds, if central banks around the world fail to manage exit strategies well.

But currency values are determined only relative to the value of other currencies. And with that in mind, the dollar is positioned, on a relative basis, to perform quite favorably. In fact, I’ve been suggesting a win-win scenario is shaping up for the dollar.

And that leads me to …

Exhibit B: Growth and interest rates

Growth and interest rate differentials are key drivers in determining how capital flows around the world.

Within that framework, let’s take a look at the projections for growth and interest rates from the Organization of Economic Cooperation and Development (OECD) for final 2009, 2010 and 2011:

Growth and Interest Rates

As you can see, the U.S. is expected to outperform other major economies and move rates higher and at a faster rate of change. Plus, based on these fundamental drivers of currency values, the dollar is now gaining favor from the perception of growth and yield advantage.

And now …

Exhibit C: Flight to safety

The problems in the global economy still exist and threaten the sustainability of global recovery. And those risks are acting as potential time-bombs that could derail a recovery. That makes global investors nervous. When they’re nervous they want to own dollars.

We have endured the deepest and broadest global recession since the Great Depression. Over 65 countries were simultaneously in recession. And global investors responded to the uncertainty by plowing money into the deepest, most liquid market in the world — the U.S. Treasury market.

The dollar and dollar-denominated assets represented safety and liquidity then, and will continue to serve in that function as the looming risks threaten the sustainability of a global recovery. Those risks include:

  • Increasingly threatening sovereign debt problems,
  • More liquidity-induced asset bubbles,
  • And rising protectionism and geopolitical unrest.

The bubbling of these risks all present a scenario that would likely fuel greater demand for dollars.

In addition to the fundamental evidence, the case for a continuation of the recent rise in the dollar is strengthened on a technical basis …

The Technical Evidence …

Exhibit D: Trend reversal

Technically, the dollar is positioned to continue higher. On Thursday, the dollar index surpassed its December highs, confirming an impulsive C-wave of a corrective A-B-C Elliott Wave structure.

U.S. Dollar Index

Source: Bloomberg

Without getting into all the technical jargon, this particular indicator projects a move to at least 81.50. That’s 4 percent higher from current levels and nearly 10 percent higher from the November lows.

Exhibit E: Beginning of bull market cycle

The long-term cycles suggest the dollar could be in the early stages of a multi-year bull market, too.

U.S. Dollar Cycles

Source: Bloomberg

The weekly chart above shows the peak-to-trough cycles of the U.S. dollar. Since the failure of the Bretton Woods system, there have been five distinct cycles in the dollar that have lasted an average of 7.4 years.

Comparing the lengths of prior cycles argues that a new bull cycle began in March of 2008, with the risk aversion rush into the dollar. If that’s true, the sustainability of dollar strength could surprise a lot of people.

Lastly, There’s the Market’s Perception …

Currency markets are very sensitive to general market focus. The focus of market participants was intently on the U.S. for much of 2009, scrutinizing all of the policy decisions, selling the U.S. dollar and ignoring the status of the rest of the world. But now the focus has changed …

Indeed, a Bloomberg poll taken this week is indicative of how quickly perception can shift. According to the poll, investors have turned bullish on the U.S., a stark contrast from the views just a quarter ago. And 62 percent think that China — the recently loved “growth engine” of the world — is a bubble.

So it turns out the rest of the world isn’t in such good shape. And comparatively speaking, I think the U.S. and the dollar look pretty darn good.

Regards,

Bryan

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in