Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

U.S. Dollar Bull Market Update

News_Letter / US Dollar Oct 27, 2008 - 12:14 PM GMT

By: NewsLetter

News_Letter October 26th , 2008 Issue #35 Vol. 2
The role of the U.S. Dollar as the worlds reserve currency kicked into gear this past week which accelerated the up trend of the US Dollar towards its initial forecast target of USD 90 as per the analysis of mid August 08 which was made against the overwhelming consensuses at the time that basically viewed an imminent collapse of n the US Dollar. Which despite the exceptionally strong rally to date that consensus more or less remains in tact today, where still the vast majority of views remain that the Dollar's rally as temporary in advance of a much greater and near imminent collapse.


The Market Oracle Newsletter
October 26th , 2008            Issue #35 Vol. 2

Commodities Currencies Economics Housing Market Interest Rates Education Personal Finance Stocks / Financials Best Analysis

U.S. Dollar Bull Market Update

Dear Reader,

The role of the U.S. Dollar as the worlds reserve currency kicked into gear this past week which accelerated the up trend of the US Dollar towards its initial forecast target of USD 90 as per the analysis of mid August 08 which was made against the overwhelming consensuses at the time that basically viewed an imminent collapse of n the US Dollar. Which despite the exceptionally strong rally to date that consensus more or less remains in tact today, where still the vast majority of views remain that the Dollar's rally as temporary in advance of a much greater and near imminent collapse.

Even though I do understand the arguments put forward for a dollar collapse i.e. of the huge debt mountain, unfunded liabilities in the tens of trillions, rampant money printing by the central bank, and the huge federal budget deficit. However there exists the failure to recognise the fact that the U.S. Dollar has come out of a 7 year Bear Market i.e. it is NOT an over-leveradged market looking to unwind, on the contrary deleveraging of the credit bubble looks set to continue to drive the U.S. Dollar higher not only for the duration of the credit freeze which appears to be starting to thaw, but also for the duration of the global recession, as the rest of this article seeks to elaborate upon.

U.S. Dollar Worlds Reserve Currency

The fact of the matter is that unlike virtually all other countries, the United States CAN more or less get away with printing as much dollars as it likes in an attempt to fix the credit markets and alleviate the impact of the recession. Any other country will take a hit in terms of a plunging currency which is in proportion to the size of the economy, this has been witnessed by the collapse of the Icelandic Krona, and as we saw this week the British Pound crashed by some 10% on bad economic data.

The only real problem on the horizon for the U.S. is if another currency became the worlds reserve currency. Clearly there exists one such currency that many eye as a potential contender which is the Euro. However, to achieve this the European Union needs to be significantly more powerful in economic turns than the United States, as well as exhibit policies that supports a reserve currency role.

The Financial Crisis could be such an event, however as I mention above that Europe actually needs to implement policies that foster the idea of the Euro as the worlds reserve currency, which has so far not done so due to the nature of the European Union.

There are suggestions that the emerging giants such as China could take over aspects of a reserve currency given their huge reserves, however the problem staring us in the face here is that China and all of the other countries hold their reserves in U.S. dollars. Still the weight of reserves does influence U.S. policy towards countries such as China which was evident in the bailout of Fannie and Freddie Mae which so as to give U.S. Treasury status to the Fannie and Freddie Bonds held by China.

Another critical determinant of the US Dollar as an reserve currency is the fact that crude oil is by and large priced dollars despite some nibbling at the edges of movement away i.e. Kuwait's and Russia's actions. However, if the dollar strengthens as we have seen this would tend to reinforce the petro-dollar.

Bankrupt Iceland Leads the Way to the U.S. Dollar Safe haven

The bankruptcy of Iceland has brought home to financial institutions the world over that they are at greatest risk from holdings in the currencies that are backed by the smallest economies. In that respect the larger the economy the safer the currency and in that respect the U.S. Dollar remains king as a function to the size of the U.S. Economy, and therefore the United States is perceived to be the last man standing as the last that would be expected to experience economic collapse. Iceland was the first to go but won't be the last, many of the small countries will be driven towards bankruptcy with all of the consequences for depositors and into the arms of the IMF as my analysis of 2nd October warned

Therefore the credit crisis is engendering huge added demand for the U.S. Dollar that actually requires the U.S. Fed to print trillions more dollars in an attempt to satisfy the demand of panic buying of dollars in exchange for local currencies, which implies that the U.S. will use this advantage of having the worlds reserve currency by flooding the world with trillions more dollars in an effort to boost the US economy, which means in the immediate future this will have the effect of boosting the US Dollar even further despite the extra money printing as the world will see a greater relative strength in the reserve currencies economy relative to other economies and hence continuing relative Dollar strength.

Similarly the second largest economy in the world which is actually backed by stronger overall fundamentals also continues to benefit i.e. Japan, and thus will likely enable Japan also to go on a spending binge to inflate their economy with cheap Yens. Therefore this suggests that the two strongest economies of the developed world going forward will be that of the United States and Japan.

Meanwhile Europe has shown itself it be many years, and perhaps many decades away from being in a position to offer international depositors a viable alternative to either the Dollar or the Yen.

Global Recession Bullish for the U.S. Dollar

Whilst many analysts continue to correctly point out that the large emerging markets of China and India that look set to continue growing during 2009 and beyond albeit at a much reduce pace. But the talk that emerging growth will prevent a global recession fails to understand that in global economic growth terms the emerging giants are more than offset by economic contraction amongst the developed world and hence we are swiftly plunging towards a global recession due to the relative size of the developed world against the smaller emerging economies.

From what I can glean from the mainstream media, the psychological impact of this has not yet hit home, however clearly the market consciousness is aware of this and hence the deflationary trends being observed and the flight towards the worlds first and second reserve currencies i.e. the U.S. Dollar and the Yen, in fact the Japanese Yen is being fed by the stronger dynamics of the reversal of the carry trade.

Therefore this suggests that the impact of the global recession will lead to a prolonged rally in the U.S. Dollar for the duration of the recession, as eventually even the emerging powerhouses of India and China succumb to economic difficulties with signs already appearing in China of escalating company closures in many of its industrial heartlands as the West demands less Chinese goods. As emerging markets succumb to economic weakness the tendency will be to devalue their currencies against the US Dollar and other western countries so as to stimulate overseas consumer demand for exports.

Additionally in advance of the economic downturn, Dollar investments abroad are in the process of being repatriated back to the United States, and the same holds true for other Western countries that invested heavily in the emerging markets.

Gold Fails to Shine in its Moment of Glory

Those looking towards Gold to resume its role as the worlds reserve currency have received their answer. For the financial crisis was THE seminal moment for Gold to shine and take up the reserve currencies mantel, but it clearly FAILED to do so, this is telling me that much chatter of a return to the gold standard is not going to happen. Yes gold still functions as an inflation hedge of sorts and in times of financial or economic distress some will turn to gold due to memories of time past, however whatever happens in the future with regards the Dollar, one things for sure that central banks, governments, and financial institutions do not view gold as a viable alternative to a FIAT reserve currency. On a positive note Gold has outperformed most other commodities and asset classes in having fallen less in dollar percentage terms than what other markets have, so there is still a limited role for gold as a safe-haven, just not the safe haven that many gold investors had imagined or hoped for it to become. Still gold will benefit from the mega-trend as the investment strategy elaborates upon.

Investing Strategy

In my earlier analysis - Stocks Bear Market Long-term Investing Strategy , I suggested a strategy for long-term investing in the aftermath of the crash of 2008 and during the remaining bear market with the focus in the mega-trends of energy, agriculture and other commodities, if anything economic contraction will be eventually even more bullish for commodities in the long-run as investment is cut back due to deleveraging and recession. Whilst people's focus appears to be on Gold, investors may miss the collapse presented in other commodities such as Platinum which has crashed by over 60%, against Gold's drop of 30%.

The current trend of deflation confirms that asset and commodity prices will continue to be depressed over the next 6 to 12 months and hence feed the suggested accumulation strategy which has a 5 to 10 year return time frame on the premise that stock markets will bottom long before recovery in the economic data becomes apparent, as is the fact that the markets have already discounted deflation to a significant degree and at some point will start to discount the coming reflation and economic recovery by adjusting asset prices higher. The investing strategy analysis suggests a low for the major western stock indices between May and July 2009.

Analysis of March 2008 - DELEVERAGING- Gold and Commodities Teetering on the Brink of a Bear Market? suggesting deleveraging deflation to continue into early 2010, therefore implying that the stock market trend following the mid 2009 low will be subdued or more saucer shaped in formation.

Off course a full fledged economic depression would blow this strategy out of the water, however I do not see such an outcome despite much of the mainstream media looking towards the 1930's as a comparison, though closer analysis should show that recessions are always different then the ones before as policy makers take into account of what transpired in the past and hence the outcome tends to be for something that is different and perhaps unexpected than the conclusions arrived at early on during an new economic down-turn.

U.S. Dollar Bull Market Technical Analysis

The above is based on the big picture assumptions and now for down to earth Technical Analysis of the actual price action which is an update of the analysis of mid August 08 - "The US Dollar will target a move towards significant resistance at 80, following which the Dollar is expected to consolidate with the previous resistance levels turning into support levels i.e. Major support at 74.30 and 78, before the next leg up through resistance above 80 takes place towards a longer-term target for the dollar of 90."

TREND ANALYSIS - The US Dollar rally has been extremely explosive of late, with both of the up thrusts into mid September to USD 80 and the current to USD 87, exceeding original expectations in terms of time, this supports the view that the trend is strongly bullish and confirms that we are witnessing a longer term change in trend for the US Dollar than a correction against the US Dollar 7 year bear market. Immediate resistance lies at USD 90, which is required to be breached for the USD to build a base for the next leg higher.

Price Targets - The price target for a dollar correction coincide with the previous highs and lows of between 85 and 82. The upside price target is clearly 90 and then 92. The USD has significant resistance above $90 and therefore suggests the USD will find it tougher to sustain any further rally beyond this level and therefore suggests early 2009 will be a period of consolidation rather than continuing relentless dollar advance.

MACD - The MACD is overbought in the immediate term and therefore suggests an imminent significant correction. However longer-term supports a change in trend from bear to bull.

SEASONAL TREND - The USD is moving opposite to its seasonal trend which also confirms that the USD has now moved from a bear market to a bull market and therefore seasonal trends generated over the bear market no longer apply or the reverse now applies, which therefore implies that the USD should fall into November end and Rally into December end.

ELLIOTT WAVE THEORY - The wave pattern is showing a clear 5 wave advance, in advance of a significant correction. The only question here is has the Dollar already peaked or will it push higher over the next few days towards USD 90 target before correcting.

US Dollar Forecast Conclusion

The US Dollar is now clearly in a bull market. However the immediate future suggests a significant correction, the only question mark is will the USD assault on USD 90 or not before correcting. The target for the correction is for a decline of about 5 cents from the high to between the zone of 85 to 82 with major support at USD 80 should it overshoot to the downside, with a time target by late November. After the correction the US Dollar is expected resume its trend higher into the end of December to above USD 90, targeting USD 92 at which time I will update the US Dollar Bull Market Forecast for the next 2 to 3 months.

The consequences of an imminent US Dollar correction will be to provide temporary relief to commodities such as Gold.

The Credit Crisis Survival Kit

Elliott Wave International, the world's largest market forecasting firm, put together this free resource featuring 15 hand-picked reports and videos that will show you:

  • How we got into this mess
  • How to survive and prosper from it
  • When you can expect the crisis to end
  • Read All 15 and Download Your Free Credit Crisis Survival Kit

    Have Investors Panicked and Capitulated?

    Robert Prechter examines historical stock activity to identify how and when fear and panic is recorded in stock market price. He even provides unique insight for whom you should vote in November.

    The Russian and Chinese stock markets are now down more than 70 percent. Commodities, most of which made all-time highs this year , have plummeted in unison like never before: platinum is down 63%, copper 52%, oil 53%, silver 56%, wheat 57%, corn 54%, soybeans 49%, cotton 54% and the CRB index of commodities a whopping 42% in three months , after peaking in July. We warned that the government's ethanol program would be another fiasco, and corn investors are learning that lesson. Even gold, which is real money, is down 28%. Everyone wants cash , and they are selling everything to get it .”

    EWI has made available to Our readership the following RISK FREE offer.


    The Elliott Wave Financial Forecast (monthly)
    (U.S. Stocks, Gold, Silver, Bonds, U.S. Dollar | 10 pages)
    $19/month value ... includes previous month's archived issue

    Financial Forecast Short Term Update (M, W, F)
    (U.S. Stocks, Gold, Silver, Bonds, U.S. Dollar)
    $39/month value ... includes previous three archived issues
    Bob Prechter's Elliott Wave Theorist (monthly)
    (U.S. Stocks, Social Trends, Big-Picture Insights | 10 pages)
    $20/month value ... includes previous month's archived issue

    More than $350 value for just $59 RIsk Free (you can get your money back any time during your first 30 days)

    Your Dollar safe haven analyst

    Nadeem Walayat,
    Editor of The Market Oracle

    Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

    Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash.

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

    Attention Editors and Publishers! - You have permission to republish THIS article. Republished articles must include attribution to the author and links back to the http://www.marketoracle.co.uk . Please send an email to republish@marketoracle.co.uk, to include a link to the published article.

    For more in depth analysis on the financial markets make sure to visit the Market Oracle on a regular basis.

    Subscription

    You're receiving this Email because you've registered with our website.

    How to Subscribe

    Click here to register and get our FREE Newsletter

    Forward a Message to Someone [FORWARD]

    To update your preferences and access the Newsletter archive [PREFERENCES]

    How to Unsubscribe - [UNSUBSCRIBE]

     

    About: The Market Oracle Newsletter


    The Market Oracle is a FREE Financial Markets Forecasting & Analysis Newsletter and online publication.
    (c) 2005-2008 MarketOracle.co.uk (Market Oracle Ltd) - The Market Oracle asserts copyright on all articles authored by our editorial team. Any and all information provided within this newsletter is for general information purposes only and Market Oracle do not warrant the accuracy, timeliness or suitability of any information provided in this newsletter. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We recommend that independent professional advice is obtained before you make any investment or trading decisions. ( Market Oracle Ltd , Registered in England and Wales, Company no 6387055. Registered office: 226 Darnall Road, Sheffield S9 5AN , UK )

    Terms of Use | Privacy Policy

    Copyright 2008 MarketOracle.co.uk

    © 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