US Dollar Woes: What's Next?

08/04/2017 3:01 am EST


Jon Strebler

Editor, Dow Theory Letters

The US dollar has been weak for months, and by now that fact hasn’t escaped many people’s attention. The reason for its weakness is an important question and the answer isn’t simple, asserts Jon Strebler, editor of Dow Theory Letters.

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Because changes in currency, or Forex, values impact just about everything in a big way in our global economy, business and governments constantly adjust their holdings of various world monies.

They do so for a variety of reasons, based on a number of often conflicting goals. Speculators are naturally attracted to these huge markets and their fluctuations, and together all parties transact an average of over $5 trillion a day in the Forex markets.

A great many factors influence currency values. First and foremost is the demand for foreign goods and services. Every time we buy something made in China, for example, our dollars must be exchanged for yuan, since Chinese workers can’t use dollars at their local McDonalds.

That increases the demand for yuan, while increasing the supply of dollars. Other factors affect the supply of a currency or the demand for a currency.

An incomplete list of those currency value determinants includes: foreign investment, speculation, monetary and fiscal policies, relative inflation rates, relative interest rates, and safe haven concerns. 

Those last two determinants are probably the most relevant these days (apart from the demand for goods and services). We know, or at least most folks think, that a big reason for the dollar’s strength between 2014 and 2017 was the expectation that the US Fed would soon end its accommodative policies and begin raising interest rates, followed by its actual raising of rates.

Investors moved their money to the US to take advantage of our relatively higher rates, exchanging their pounds, euros and whatnot for our dollars, thus pushing the dollar price up. 

Additionally, the US is traditionally seen as a safe, stable place, and people of course like that, which contributed to good demand for the buck. 

But now the end to increasing US rates seems to be within view, while other countries are at least thinking about raising their rates before too long.

Meanwhile on the “safe, stable” front, the current administration is seen rather universally as in chaos, turning away from historic allies, unable to effect meaningful legislation, and offering no real responses to the serious threats that Russia and N. Korea represent.

I don’t know how significant those concerns are in decreasing the demand for dollars and thus increasing the supply, but imagine they aren’t being ignored. For these and doubtless other reasons, the dollar has been on the ropes.

The weekly bar chart reminds us that it has fallen from 103 and change down to 93 and change – a move of about 10%. That’s a big decline. And even as some have just recently commented on this “new” trend, it looks to me as if the dollar has a real chance of heading back up from current levels, based on this chart.


A look at the main chart shows the dollar back at the horizontal blue line, a level of good support over the last couple of years. The upper RSI indicator shows the dollar now in the oversold zone (blue oval), for the first time since at least 2013.

On the bottom MACD indicator, the buck in still in a nose-dive, not yet showing signs of bottoming, but getting pretty far into an oversold situation. Conclusion: There are no guarantees in this kind of thing, but the dollar sure looks like a “buy” on this chart, for a short-term bounce at least.

And who knows? It could well be that the Trump administration finds its footing and starts alleviating some of the concerns people have; it could well be that the interest rate scenario shifts a bit in the near future. All kinds of things “could well be” that stabilize the dollar or even put it back into a bull market.

So I expect an upside pop in the dollar very soon, most likely followed by a decline below that 92 level and back into the 80s. But who knows? The contrarian in me says we might get more than just a pop to the upside, although the odds favor a continuing bear market in the dollar, post-rally.

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