Since last November, 2009 the dollar has climbed steadily against a basket of currencies — most notably against the euro – and based on my analysis, the weight of evidence suggests that we’ve likely seen the bottom in the dollar, with a multi-year bull market ahead. Words: 738
In further edited excerpts from the original article* Byran Rich (www.moneyandmarkets.com) goes on to say:
That’s a high level view but how are things shaping up on a shorter term outlook for the buck? Let’s take a look at the four stages of this prospective dollar bull market and the immediate catalysts that should underpin its continued strength:
Stage 1: Marking the Bottom
My analysis of the seven-year cycles in the dollar index suggests a cyclical bottom was marked when the dollar rallied sharply off of its all-time lows in 2008 driven by the uncertainty surrounding a growing financial and economic crisis. Back then, capital fled all areas of the world in search of safety and the dollar represented a safe parking place.
Stage 2: Retracement Period
Then we had the deep retracement of 2009. The global economy was showing signs of stabilization that encouraged global investors to start dipping their toes back in the water, i.e. taking risk again. That’s when capital was reversed out of the dollar in search of higher risk, higher return assets.
Just when sentiment was about as negative toward the dollar as it could possibly get, we were introduced to the first sign of collateral damage from the financial/economic crisis and the unprecedented government responses: crumbling government finances.
Stage 3: More Fear; More Risk Aversion
In recent months much of the dollar strength has been driven by fears of a sovereign debt crisis and much of that strength has come at the expense of the euro and the British pound.
We’ve seen the dominos of a potential sovereign debt crisis line up. The tremors that started in Dubai, quickly turned scrutiny toward Greece and the other weak spots in the euro zone – Portugal, Italy, Ireland and Spain – and it appears increasingly likely to soon weigh on the UK economy and the British pound.
As we know, currencies don’t operate in a vacuum. They’re valued relative to the value of another currency. So, given the recent concerns about the future of the euro and the increasing spotlight on the next sovereign debt domino, the UK, the dollar is benefiting primarily because of the weakness of other major currencies.
There’s another developing situation that should offer more fuel for the dollar …
Stage 4: A Falling Yen
The euro, the British pound and the Japanese yen make up 83 percent of the dollar index, the often quoted proxy for the economic firepower of the U.S. dollar on a global level. While the pound and the euro have been under assault in recent weeks, the yen has been pushed and pulled in a tug of war – strengthening as capital flows out of risky euro/yen and pound/yen positions, and weakening on the basis of fundamental divergences between the recovering U.S. economy and the deflation-burdened Japanese economy.
The fundamental evidence has been clearly favoring the dollar relative to the yen for some time. What’s been lacking is a catalyst to send it higher but a clear catalyst to sell the yen against the dollar has just occured – the Japanese yen has once again become the cheapest currency in the world to borrow. Based on the diverging policy paths of the U.S. and Japanese central banks, this differential should continue to widen in favor of U.S. rates and dollar strength relative to the yen.
Given the ongoing crisis surrounding the euro, the vulnerability of the British pound from a continued spread of sovereign debt concerns AND the catalyst for a weakening yen, I’m expecting the dollar to continue its upward path against major currencies both in the short-term and longer-term.
*http://www.moneyandmarkets.com/the-four-stages-of-the-prospective-dollar-bull-market-38290 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.)
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