Re-Thinking the “Death of the Dollar”

10/13/2009 12:01 am EST

Focus: FOREX

Robert Prechter

Founder and President, Elliott Wave International

If you want the latest news on the US dollar index, try a search under its new ticker symbol, RIP—as in, "rest in peace." Let the record show: In the early morning hours of Tuesday, October 6, the mainstream financial community officially declared "The Demise of the Dollar" (The Independent).

The "coroner's report" cites these details as the causes of death:

  • An alleged (and later denied) secret meeting among leaders of certain Arab states, China, Russia, and France, which aimed for the immediate discontinuation of oil trading in US dollars
  • And, an open statement from one senior United Nations official that proposed the dollar be replaced as the world's reserve currency

In the words of a recent Washington Post story, "The growing international chorus wants the dollar replaced... a move that would end the greenback's six decades of global dominance."

And with that, the line between negative sentiment and extreme negative sentiment was crossed. It occurs when the beliefs about a market lean so far over in one direction that the boat investors are sitting in is about to tip over—just like the last time.

Case in point: Spring 2008. The US dollar stood at an all-time record low against the euro after plunging more than 40% in value. And, according to the usual experts, the greenback was "dead"—set to meet its maker. On this, these news items from early 2008 say plenty:

  • "The dollar is a terribly flawed currency and its days are numbered."(Wall Street Journal quote)
  • "It's basically the end of a 60-year period of continuing credit expansion based on the dollar as the world's reserve currency."(George Soros at the World Economic Forum)
  • "Greenback is losing Global Appeal... the 'Almighty' Dollar is Gone."(Associated Press)

Yet, from its March 2008 bottom, the US dollar came back to life with a vengeance, soaring in a one-year long winning streak to multi-year highs.

I recently presented the following close-up of the dollar index since that trend-turning bottom.

Click to Enlarge

At a measly 6% bulls, the bearish dollar boat tipped over. The situation today is even more remarkable: The percentage of bulls is lower, at 3%-4%, while the dollar's value is higher than the March 2008 level.

It's crucial to understand that markets don't necessarily respond to sentiment extremes immediately. But, such extremes do indicate exhaustion of the trend, which is usually the opposite of what the mainstream expects.

By Robert Prechter of Elliott Wave Theorist newsletter

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