Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Four Stages of the Prospective U.S. Dollar Bull Market

Currencies / US Dollar Mar 14, 2010 - 03:22 PM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleSince last November, the dollar has climbed steadily against a basket of currencies — most notably against the euro. And based on my analysis, I think it’s just the early stages of this trend.

In fact, for many of the reasons I’ve discussed in past Money and Markets columns, the weight of evidence suggests that we’ve likely seen the bottom in the dollar, with a multi-year bull market ahead.


That’s a high level view. But how are things shaping up on a shorter term outlook for the buck?

Let’s take a look at the four stages of this prospective dollar bull market and the immediate catalysts that should underpin its continued strength …

Stage 1: Marking the Bottom

My analysis of the seven-year cycles in the dollar index suggests a cyclical bottom was marked when the dollar rallied sharply off of its all-time lows in 2008 driven by the uncertainty surrounding a growing financial and economic crisis.

Back then, capital fled all areas of the world in search of safety. And the dollar represented a safe parking place.

Stage 2: Retracement Period

Investors shunned the dollar in search of bigger returns.
Investors shunned the dollar in search of bigger returns.

Then we had the deep retracement of 2009. The global economy was showing signs of stabilization that encouraged global investors to start dipping their toes back in the water … i.e. taking risk again. That’s when capital was reversed out of the dollar in search of higher risk, higher return assets.

And just when sentiment was about as negative toward the dollar as it could possibly get, we were introduced to the first sign of collateral damage from the financial/economic crisis and the unprecedented government responses: Crumbling government finances.

The first wobbling sovereign nation, Dubai, quickly splashed water on the face of an increasingly optimistic global investment community. All of the sudden the theories of a V-shaped recovery became fractured by the realization that the widespread economic crisis could run deeper — a scenario that many had conveniently and complacently dismissed.

Stage 3: More Fear; More Risk Aversion

The dollar has benefited from weakness in the pound.
The dollar has benefited from weakness in the pound.

In recent months much of the dollar strength has been driven by fears of a sovereign debt crisis. And much of that strength has come at the expense of the euro and the British pound.

We’ve seen the dominos of a potential sovereign debt crisis line up, as I detailed in last week’s column. The tremors that started in Dubai, quickly turned scrutiny toward Greece and the other weak spots in the euro zone (Portugal, Italy, Ireland and Spain). And it appears increasingly likely to soon weigh on the UK economy and the British pound.

As we know, currencies don’t operate in a vacuum. They’re valued relative to the value of another currency. So, given the recent concerns about the future of the euro and the increasing spotlight on the next sovereign debt domino, the UK, the dollar is benefiting primarily because of the weakness of other major currencies.

And there’s another developing situation that should offer more fuel for the dollar …

Stage 4: A Falling Yen

The euro, the British pound and the Japanese yen make up 83 percent of the dollar index, the often quoted proxy for the economic firepower of the U.S. dollar on a global level.

Japan's deflation has taken a toll on the yen.
Japan’s deflation has taken a toll on the yen.

While the pound and the euro have been under assault in recent weeks, the yen has been pushed and pulled in a tug of war: Strengthening as capital flows out of risky euro/yen and pound/yen positions, and weakening on the basis of fundamental divergences between the recovering U.S. economy and the deflation-burdened Japanese economy.

But the fundamental evidence has been clearly favoring the dollar relative to the yen for some time. What’s been lacking is a catalyst to send it higher.

Well, over the past two weeks we’ve finally gotten a clear catalyst to sell the yen against the dollar.

Catalyst for Yen Weakness

Back in August 2009, it became cheaper to borrow dollars (compared to borrowing yen) for the first time in sixteen years. In the chart below, you can see when the short-term interbank borrowing rate for dollars (Dollar Libor, the blue line) crossed below the equivalent interbank borrowing rate for yen (Yen Libor, the red line).

Libor Rates Chart

Source: Bloomberg

What looks like a minor rate differential can have a major impact on market perception. Since that cross occurred, the dollar lost as much as 13 percent against the yen as global investors began favoring dollars, as opposed to yen, to fund carry trades … i.e. selling dollars to fund the purchase of high yielding currencies.

But as of last week, this differential has crossed back, once again making the Japanese yen the cheapest currency in the world to borrow. And based on the diverging policy paths of the U.S. and Japanese central banks, this differential should continue to widen in favor of U.S. rates and dollar strength relative to the yen.

So given the ongoing crisis surrounding the euro, the vulnerability of the British pound from a continued spread of sovereign debt concerns AND the catalyst for a weakening yen, I’m expecting the dollar to continue its upward path against major currencies both in the short-term and longer-term.

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