These 7 Charts Show Underlying Future Strength of U.S. Dollar
Despite all of the mania surrounding the dollar in recent months history suggests that the Fed’s last adventure in quantitative easing will not have a draconian outcome on the dollar as many analysts and pundits predict! Words: 952
So says Byran Rich (www.moneyandmarkets.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted and edited […] below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Rich goes on to say:
For a big picture perspective let’s take a look at seven key charts to see what may be in store for the dollar after the QE buzz has faded.
#1: Long-term U.S. Dollar cycle suggests Dollar has more time and room to gain strength
You can see in the chart below the roughly seven-year cycles in the dollar dating back to the failure of the Bretton Woods system 40 years ago. These cycles argue that a bull cycle in the dollar started in March 2008 which would put the dollar just 2.6 years into its new bull cycle or a bit more than a third of the way through a typical long-term dollar cycle.
Without question, this recent cycle has been very volatile but the dollar continues to trade comfortably above its 2008 all-time lows and the lows of last year, making higher lows along the way — a bullish pattern.
#2: 10-year U.S. Dollar Index suggests a major uptrend is about to occur
The chart below shows the roughly seven-year downtrend in the dollar and the subsequent ascending channel that started in 2008. You can see that the dollar is now testing the bottom line of this bull channel, an attractive area to buy the greenback. [Indeed,] a bounce from these levels would project a move toward the top line of the channel or about 23 percent higher.
#3: 10-year Euro/Dollar ratio suggests future strength in Dollar
The euro chart is essentially the inverse of the dollar and here, too, you can see a long multi-year trend going higher followed by a descending channel.
The euro also is bumping into a technical boundary, one that represents a downward trending channel. A fall from this level of resistance would open up a downside for the euro that would be right on target with most bearish estimates espoused when the euro zone was at the height of its crisis … parity versus the dollar.
#4: Euro’s 22-week run suggests a correction is imminent
The euro is in the midst of its strongest 22-week run on record, surpassing its prior record surge in 2003 — both areas are noted in the chart below.
What’s notable here is that in 2003, a 9 percent correction abruptly followed this strong climb. From current levels in the euro, a similar correction would mean a move down to 1.30 over the next few months.
#5: British Pound shows continuous weakness compared to U.S. Dollar
Despite all of the fuss over the weak dollar, the British pound is still trading nearly 25 percent weaker against the dollar since the onset of the financial crisis three years ago and the chart below shows that, while the dollar and the euro are bumping into critical long-term technical areas, so is the pound.
#6: Attemped devaluation of Japanese Yen should strengthen U.S. Dollar
The long-term chart [below] in dollar/yen going back 40-years (since the failure of the Bretton Woods system) shows its steady decline. Even given its recent intervention the pair is nearing all-time lows (lows in the dollar, highs in the yen).
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From this chart, compared to the charts of the euro and the pound, you can see the lion’s share of dollar weakness over the past few years has come from the surging yen and now, as this dollar/yen exchange rate nears all-time lows, the Bank of Japan is rolling out its most aggressive deflation-fighting act yet – more QE, more fiscal policy and a cut in what’s left of its interest rate – plus the Bank of Japan is officially in intervention mode — all things that make a case for a bounce in dollar/yen.
#7: Chinese Yuan getting weaker
With the Fed’s QE2 policy officially on the table the emerging market and Asian countries that have been waging a fight to keep their currencies from a runaway surge have already stepped up with more currency market intervention and talks of capital controls and they are doing so because the dollar is weakening. More importantly, [however,] they are reacting because the Chinese yuan is getting weaker relative to their currencies in the process — a competitive disadvantage for their export trade.
The key take-away: A grossly weaker dollar is not an economically or politically acceptable proposition for the world – and trouble for the world economy represents trouble for the U.S. economy.
In conclusion, despite all of the bold projections of a continued rout in the dollar, these seven charts suggest the exact opposite outcome could be around the corner.
[The U.S. Dollar Is Still Standing Tall Compared to Many Other Currencies!]
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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