This is Getting Serious

Mar 15, 2008: 6:00 PM CST

The US Dollar Index continues to make new lifetime lows, which is affecting other markets and economic environments.

The Index compares how the US Dollar fares against other currencies, and a country’s currency often is indicative of the economic strength. Rather than discuss complex economic factors, let’s simply look at the charts, which tells the whole story.

I’ve given you a bonus and added two key divergences which preceded price action both to the upside and the downside.

The monthly chart shows that the US Dollar Index peaked at $120 in 2001 and has now stands in 2008 at $71.67. As if this decline wasn’t serious before, it’s serious now.

With the Federal Reserve likely to cut interest rates next week, this will put further downside pressure on the index, provided the cut is not already factored into the price. Economic changes take time to filter through the price, but it’s clear the direction of the trend is still down and will take quite a large shift to turn the tide of this trend.

Also, it’s important to note that crude oil is priced in dollars for all countries, and so as the dollar gets cheaper, countries producing oil receive less profits, and so they do what they can to ensure that the price of oil rises to compensate for this discrepancy. Some analysts have said that it isn’t long before these countries move to quote the price of a barrel of oil in Euros, and no longer the dollar, which could help them. The Euro is currently stronger than the dollar, and the exchange rate is currently above $1.50 for one Euro.

As a bonus, let’s look at the price of oil since 1999, which was trading around $15 at that time and now trades at all-time highs of near $110.

For traders, these trends offer wonderful and stable methods to profit, but for average Americans and global citizens, these trends do not serve them in everyday life. Higher oil prices hurt all sorts of industries and individuals, and Americans are finding it more expensive to travel overseas. Multi-national companies based in the US fare well when they convert currencies from other countries back into US Dollars, but there aren’t a lot of other entities that benefit directly from a low dollar.

Nevertheless, these trends will be in force until a major economic factor (or cascade of factors) changes, but it’s probably best not to bet on that happening any time soon.

2 Comments

2 Responses to “This is Getting Serious”

  1. jason Says:

    Time to buy the dollar next week 🙂

    feds done.

  2. Corey Rosenbloom Says:

    Jason,

    I don’t know. I’m a technician, and so following price, I would need to see some sort of reversal pattern, or indicator divergence, or some consolidation. There will at least be a period of consolidation should the dollar stop falling, but I see no current technical signals that a reversal is ahead yet.

    Good luck!