Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

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

6 Critical Money Making Rules