When you look at the US Dollar Index, you have to think of this in terms of what the US dollar is doing against the Euro, the British pound, and the Japanese yen. After all, the Euro makes up 57.6% of the index, the Japanese yen makes up 13.6% of the index, and the British pound makes up 11.9%. This makes up 83.1% of the total value of the US Dollar Index. In other words, it takes surprisingly little to make this thing move in one direction or the other.
For example, if you have a very soft Euro, that in and of itself can cause upward momentum in this market. Add to that the fact that the Bank of Japan continues to demand that the 10 year Japanese Government Bond is capped at 0.25%, the Japanese yen is essentially toilet paper at the moment. (In short when you buy “unlimited bonds”, you have to print currency to make that transaction, thus flooding the markets with the currency.) Add to that the budgetary concerns in the United Kingdom, and there’s no way to bet against the greenback right now.
This is not to say that the US dollar won’t have the occasional pullback, and when you look at the chart you can see that we are at a historic turning point near the 2001 peak. However, one thing the technical traders forget is that there has to be a reason for a turnaround. It’s not just simply a matter that people had sold there previously, because quite frankly we are approaching resistance that was seen 21 years ago. Very few of those traders are still involved in that trade at this point.
Yes, I do think that a pullback could be coming, but the US dollar should continue to be a currency that you wish to own on dips, because quite frankly the Federal Reserve is looking to tighten monetary policy in order to fight inflation. As things stand right now, we are at over 8% inflation year-over-year, which is a far cry from the 2% that the Federal Reserve tries to get. In other words, tightening will continue until demand drops. If you don’t believe me, take a look at what’s happened to the stock market, and realize that the Fed is still moving forward running off its balance sheet, tightening rates, etc.
The real “line in the sand” is near the 120 level in the US Dollar Index. If we break above there, we could see a lot of things break, and it will be interesting to see what the next move would be. On the chart attached to this article, I have it on the monthly time from going back to 1980. If we were to break above 120, you could rise all the way to 160 in theory. If that happens, almost everything else will be trashed from a risk asset perception.
The move in the US Dollar Index would not be negated at this point until we break below the 100 level, or if the Federal Reserve were to suddenly change its attitude. I just don’t see how that could be the case unless something seriously systemic breaks. We recently had the threat of the UK pension system collapsing, and the Fed didn’t move. In other words, it’s going to take something mind-boggling to make them change their trajectory, or perhaps we can apply Occam’s razor: inflation has to drop several percentage points.
The US dollar should continue to be by far the strongest currency. It’s not that it can’t pullback, and it most certainly will. However, I will continue to look at that as an opportunity to buy greenbacks at a discount.