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U.S. Dollar at Risk of Unraveling

Currencies / US Dollar Jul 15, 2009 - 11:03 AM GMT

By: Guy_Lerner

Currencies

Best Financial Markets Analysis ArticleThe Dollar Index (symbol: $DXY) is trading significantly lower this morning, and it is at risk of closing the week below three pivot points as seen on the weekly chart in figure 1.


Figure 1. Dollar Index/ weekly

I discussed the significance of this pattern in the June 19 article, "Very Dangerous Time For Dollar Index". Essentially, this is a very ominous price pattern that portends a high likelihood of a major down draft for the Dollar Index. A weekly close below the third pivot point at 79.46 would make this pattern valid.

If the Dollar Index were to be set on a downward spiral, I think the biggest beneficiaries would be long term Treasury yields and gold. I have been "pounding the table" for higher Treasury yields for months, and this might be another tailwind that sets that ship in motion. Gold has been on the launching pad for a significant and sustainable move in either direction for months, and the Dollar's downdraft might be the thrust to launch gold higher.

Figure 2 shows a concept that I have put forward before, and it is gold's performance relative to a basket of 8 currencies. Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. This is a weekly chart. (As an aside, this chart looks different than previous charts I have shown as I now have the calculations correct.) Relative to other currencies gold has yet to break out, but I still like the position that gold is in. The indicator is making higher lows, and a breakout will carry prices a long way.

Figure 2. Gold v. Currencies/ weekly

As far as equities are concerned, a lower Dollar will float all boats. Just look at today's price action. All assets -except bonds - are higher. However, it is all relative as higher equity prices in the face of a lower Dollar doesn't really get you anywhere. No country has ever devalued its way to prosperity. Commodity based economies (i.e., Canada, Brazil, South Africa, and Australia) should outperform non-commodity dependent economies. Furthermore, a lower Dollar will keep the inflation debate -real or perceived - on the front burner, and this will be a definite headwind for equities. In sum, a lower Dollar should benefit Treasury yields and commodities more than equities.

By Guy Lerner

http://thetechnicaltakedotcom.blogspot.com/

Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

© 2009 Copyright Guy Lerner - All Rights Reserved
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 losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Guy Lerner Archive

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