Tag Archives: USD

What Exotic Currencies are Saying about the US Dollar

One of the most confounding mysteries currently confronting the forex market is the dramatic drop of the US dollar. Few recent trends have continued for as long, or proved as lucrative, as the enduring fall of the currency since a new low was first reported on in summer 2014.

Forex brokers and traders watched, cautiously, as the EURUSD pairing broke the 2010 low, threatening to hit levels not seen since 2005 at 1.1640. Simultaneously, USDJPY’s 2007 high began to draw attention at the next upside target, at 124.41.

Despite this move higher, traders have remained unwilling to trust in the recovery of the currency, which has not been supported by a firm multi-percentage correlation. As a result, more and more of them are turning to foreign currencies in search of clues as to the future of the US dollar.

The Significance of Exotic Currencies

Although there is a tendency within the forex market to overlook them, exotic currency trends can provide a useful tool in the determination of the true state of the US dollar, helping to uncover whether it’s favoured across the board or only against low-yielding FX.

At the current time, a depressed interest rate environment largely defines the world economy. With interest rates having been lowered around the globe in line with the aims of quantitative easing programs, an assessment of the performance of individual currencies can be distorted. This is where exotic currencies come in useful, as the economies whose interest rates have remained high provide a unique look into the performance of the low-yielding US dollar.

For those with an understanding of the bond market, parallels can be drawn between the role of these exotic currencies and the section of the junk bond faction. The junk bond faction is made up of companies with lower credit ratings than the blue chips that most people are familiar with. The performance information they provide is unique, and can be used to provide a more coherent picture of the market in terms of rebounds in risk and fluctuations in risk sentiment before they become obvious through comparisons with other sections. Similarly, exotic currencies provide a unique insight into the position of the US dollar, and could thus provide an early opportunity to cash in on this.

Recent Events

The US dollar’s recent gain is largely attributable to an announcement made by the Federal Reserve, which claimed that the country was ending its multi-year quantitative easing program. With many other central banks not yet embarked upon or in the midst of their own programs, this saw the dollar gain against low-yielding currencies like the EUR, JPY, CFH and GBP.

This trend was all that certain factions of the market took note of. However, by widening the lens, we see that higher yielding currencies, such as the ZAR, did not respond in the same way.

A second statement by the Federal Reserve, a commitment to ‘patiently’ raise rates over the course of 2015, has also been instrumental in fuelling USD fever. Yet if we look to the story told by exotic currency rates, the tale is very different A Bearish Engulfing Pattern is evident for the USDMXN pair, suggesting that something could be amiss. Indeed, a break below the 17th December figure of 14.37 could catalyse a drop against other higher-yielding currencies such as the AUD, NZD and ZAR, amongst others.

So what does this mean for the forex market and the position of the USD going forwards? With high-yielding currencies showing strength against the former currency, a charge against it could well be in the offing. Indeed, should certain levels fail to provide continued support, a real correction may be on the horizon.

My current trading positions as of Jan 25 2013

Hello fellow traders. I thought I’d try something new. I was thinking it might be of some limited value to share my current market biases in the hope of getting some discussion going either here on the blog or on my Forex Nirvana forum (I recommend the interactive trading section).

So as of today Jan 25 2013 my current trading biases (ie positions) are as follow:

1: Long any Yen crosses

2: Long EUR/USD

3: Long GBP/USD (although I’m having second thoughts on this as it looks like it’s not yet bouning back from oversold levels. Further downside is most likely, and it’s time to consider some exit strategy or to see how much pain I can take before I run for the door.)

4: Short USD/CHF (naturally if I’m long eur/usd)

That’s it for now. Good luck to you all with your trading!

I barely finished typing this post and it looks like my long eur/usd is paying off 🙂

Why QE3 will fail, and why that may be very good for the U.S. dollar

by Jack Crooks

Jack Crooks

It seems to me the Great Depression has cast a long dark shadow over Fed Chairman Ben Bernanke’s thinking. The man seems obsessed by the idea, based on his own historical research that if the Fed had just done “more” the Great Depression could have been avoided.

I think he is dead wrong. And in fact it was the Fed that, through money and credit manipulation, set the stage that caused the Great Depression.

Mr. Bernanke gave a summary of why he believes the Fed was at fault for allowing the depression to become “Great” in a speech he gave back in 2004, “Money, Gold, and the Great Depression.” This speech provides an excellent insight into Mr. Bernanke’s core beliefs. Here are a few key excerpts:

During the first decades after the Depression, most economists looked to developments on the real side of the economy for explanations, rather than to monetary factors. Some argued, for example, that overinvestment and overbuilding had taken place during the ebullient 1920s, leading to a crash when the returns on those investments proved to be less than expected.

… To support their view that monetary forces caused the Great Depression, Friedman and Schwartz revisited the historical record and identified a series of errors—errors of both commission and omission—made by the Federal Reserve in the late 1920s and early 1930s. According to Friedman and Schwartz, each of these policy mistakes led to an undesirable tightening of monetary policy, as reflected in sharp declines in the money supply. Drawing on their historical evidence about the effects of money on the economy, Friedman and Schwartz argued that the declines in the money stock generated by Fed actions—or inactions—could account for the drops in prices and output that subsequently occurred.

… The transmission of monetary tightening through the gold standard also addresses the question of whether changes in the money supply helped cause the Depression or were simply a passive response to the declines in income and prices. Countries on the gold standard were often forced to contract their money supplies because of policy developments in other countries, not because of domestic events. The fact that these contractions in money supplies were invariably followed by declines in output and prices suggests that money was more a cause than an effect of the economic collapse in those countries.

This is a powerful defense for monetary easing. But by any measure, it seems that goal of increasing money and monetary supply to cure economic ills has already been achieved by Mr. Bernanke and Company. And they are fighting a losing battle.

As you can see in the chart below, bank reserves are in the ozone.

Chart 1

What’s more, the money supply is still trending higher …

Chart 2

But all that money is NOT stimulating the economy! The plunging rate Americans are spending is clearly shown in the following chart. I believe this drop is due to changing consumption/savings patterns as U.S. consumers attempt to recover from this serious balance sheet recession, similar to the experience of the Great Depression.

Chart 3

And so far, historically low interest rates by the industrial world central banks haven’t done diddlysquat for the unemployed.

Chart 4

Simply put, Mr. Bernanke must fix the plumbing before any amount of money is going to improve the real economy! The mechanism that transmits credit into the real economy is broken. And pushing rates lower only exacerbates the problem domestically and creates monetary tensions overseas.

What It Means for the Dollar

At first blush all this quantitative easing looks very bad for the U.S. dollar. And it has been to a large degree. But because QE3 actually retards the ability of the real economy in the U.S. to grow, it has a massive negative feedback on Europe and China; both require strong U.S. demand to export.

So in a sense, a very bad sense, QE3 may be very good for the U.S. dollar as it will likely trigger a major change in risk appetite for global assets markets. And that could happen once sentiment shifts and people realize that history shows there is much more to reviving a complex system such as the global economy than through pure money and credit manipulation.

And at some point, the liquidity-driven financial markets will reflect the very poor conditions of the underlying real economy here and abroad.

Best wishes,


Source: http://www.moneyandmarkets.com

How Long Will the Dollar Remain the World’s Reserve Currency?

green dollar sign

We frequently hear the financial press refer to the U.S. dollar as the “world’s reserve currency,” implying that our dollar will always retain its value in an ever shifting world economy.  But this is a dangerous and mistaken assumption.

Since August 15, 1971, when President Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold, the U.S. dollar has operated as a pure fiat currency.  This means the dollar became an article of faith in the continued stability and might of the U.S. government.

In essence, we declared our insolvency in 1971.   Everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it– not even a pretense of gold convertibility! Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC in the 1970s to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence backed the dollar with oil.

In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite radical Islamic movements among those who resented our influence in the region. The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as the dollar flourished.

In 2003, however, Iran began pricing its oil exports in Euro for Asian and European buyers.  The Iranian government also opened an oil bourse in 2008 on the island of Kish in the Persian Gulf for the express purpose of trading oil in Euro and other currencies. In 2009 Iran completely ceased any oil transactions in U.S. dollars.  These actions by the second largest OPEC oil producer pose a direct threat to the continued status of our dollar as the world’s reserve currency, a threat which partially explains our ongoing hostility toward Tehran.

While the erosion of our petrodollar agreement with OPEC certainly threatens the dollar’s status in the Middle East, an even larger threat resides in the Far East.  Our greatest benefactors for the last twenty years– Asian central banks– have lost their appetite for holding U.S. dollars.  China, Japan, and Asia in general have been happy to hold U.S. debt instruments in recent decades, but they will not prop up our spending habits forever.  Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency.

If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies.  If not, the rest of the world will abandon the dollar as the global reserve currency.

Both Congress and American consumers will then find borrowing a dramatically more expensive proposition. Remember, our entire consumption economy is based on the willingness of foreigners to hold U.S. debt.  We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.

Ron Paul

As China goes, so goes oil; as oil goes, up goes the U.S. dollar!

by Jack Crooks
Saturday, September 1, 2012 at 7:30am

Jack Crooks

I realize it’s never easy and rarely simple. But today I’m going to help you understand why global money-flow drives key markets and how that flow could be reversing. If I am right, it is good news for long-term dollar bulls like me, bad news for China bulls, and terrible news if you are still riding on the Peak Oil bandwagon expecting oil to hit $200 barrel soon.

Three major realities lead me to those conclusions:

Reality #1—
Foreign exchange reserves and
growth is falling in China

Some experts estimate that up to $50 billion a month is exiting China. Keep in mind, when money leaves China, it leaves as dollars for the most part. Investors exchange yuan for dollars inside China, or Hong Kong, then move those dollars to safe haven areas, such as U.S. Treasuries, U.S. farmland, or Vancouver apartment buildings.

Year-on-year change in Chinese
Foreign Exchange Reserves Growth

Chinese foreign exchange reserves

Reality #2—
Demand for oil is falling along with
global growth, and the U.S. is leading the way

China’s crude oil imports fell 3 percent in July from a month ago to a nine-month low.

The slowdown in growth is hitting oil demand hard in the country that has driven the increase in global fuel consumption for a decade. In fact, the International Energy Agency slashed its forecast for Chinese oil demand growth in 2012 by a third to 240,000 barrels per day (bpd) in its August monthly report. Just a month earlier, the agency had forecast growth of 360,000 bpd.

And in the U.S., according to Reuters, oil demand in July fell to its lowest level in nearly four years.

If demand is already low and appears to be heading lower, I think it is time to mark down oil prices.

The chart below shows oil hit a brick wall of resistance at around $98 per barrel; that happens to be a key retracement level. Plus, the price oscillators are turning down from an “overbought” level. This price action seems to be confirming bearish fundamental news.

Oil Futures Daily

Reality #3—
The dollar is the
world’s monetary standard

The demand for dollars is poised to rise as the supply falls. I say that because:

  • Dollar-based funding (supply) for trade finance and other credit lines is falling as European banks reduce the percentage of debt on their balance sheets.
  • As I explained above, dollars are leaving China. And I expect China’s foreign exchange reserve hoard to continue to decline.
  • Falling oil prices are dollar bullish, as countries that buy oil on world markets — priced in dollars — can reduce their dollar credit lines, which reduces the potential of a new supply of dollars from coming on the market.
  • If a global credit crunch similar to the credit crunch of 2007 materializes, demand for dollars and dollar-safe havens will soar.

Now, take a look at the chart below, which shows how all of these global money-flow factors discussed above relate to each other.

Chinese foreign exchange reserve growth (red line);
oil prices (black line); and the U.S. dollar index (blue line)

US dollar, oil, China FX

As you can see …

There is a lagging correlation between Chinese FX reserve growth and oil prices, with Chinese FX growth leading.

There is a tight negative correlation between oil prices and the dollar i.e. as oil prices rise the dollar tends to fall and vice versa.

If these macro trends continue to play out as I expect, your decision is easy: Sell oil, buy the dollar, and hold those positions until the trend changes.

Have a safe and happy Labor Day weekend,


Source: http://www.moneyandmarkets.com

Celebrating 40 Years of Dollar Destruction

By Sean Hyman, Editor, Currency Cross Trader

This week, we’re celebrating the anniversary of the greatest heist in recorded history.

Exactly 40 years ago yesterday, President Nixon severed the dollar’s ties to gold forever.

It was a government game so the politicians could easily pay off their debts with “cheaper dollars” for the foreseeable future.

In reality, this one decision effectively stole all our dollars’ value for decades to come. And you and I are the ones still paying for this mistake.

Strangely this decision also created the $4 trillion Forex market…and eventually sent gold racing above $1,800 an ounce.

But these profitable side effects were not Nixon’s intention…

You see, up until 1971, each dollar was physically backed by gold.

Gold was $35 an ounce and every dollar in circulation could be redeemed for gold. So every dollar was backed by the power and security of gold.

But when Nixon removed us from the gold standard, that responsibility flew out the window – along with the dollar’s long-term value.

It’s the reason the dollar has lost massive purchasing power against other currencies in the last four decades (and gold has risen 51-fold against the buck).

And get this: the worst is still yet to come for the dollar.

I’ll explain how to protect your savings in just a moment. First, let’s take a closer look at how our dollar has lost that much in value.

The Greenback Is Backed By the
“Hot Air” of Washington, D.C.

Given that the dollar has lost so much value, backing dollars with gold simply wouldn’t fly today.

As of July 2011 our “reported” gold reserves was 8,133.5 tonnes. Multiple that by the current price of gold ($1,746 as of this writing), and you can see we have a little over $454 billion bucks in gold.

In just the last year, we have had over $1 trillion dollars in circulation. So obviously we don’t have enough gold to cover all that.

But of course, that was the point of taking us off the gold standard. Otherwise, how else would we be able to write blank checks for everything we need?

Back in the Good Ole Days,
All These Dollars Would Have Had Value

In fact, it’s estimated that if you took all of the gold that has ever been mined in the world, it would only come up to about $5 trillion.Well we print trillions of dollars and run up over $14.6 trillion in debt all by ourselves in the U.S. (and that’s just one country of the world).

All these dollars are only worth something if the U.S. government says so. It’s backed by the U.S. government promise, “we’re good for it.” In other words, our dollars are basically backed by hot air straight from Washington.

But the harsh truth is they couldn’t back all of the dollars in circulation right now even if they wanted to.

Even worse, the more investors realize how shaky our currency is, the more they start looking elsewhere for more fundamentally sound currencies.

That’s one reason why the U.S. just raised our debt ceiling for the 75th time in 50 years. It’s also why the Standard & Poor’s just downgraded our debt.

Toss in the Fed’s nasty habit of creating money out of thin air anytime we need extra resources, bailouts and stimulus packages – and the dollar is in serious trouble.

The Government has Two Choices and Both are Bad… But Here’s What They Will Choose

Our economy is in shambles, and our currency is losing clout every single day. And we are no longer competitive with the rest of the world in terms of exports. We really only have two choices left to stay competitive with the rest of the world.

Either the government can allow “wage devaluation” or “currency devaluation.” In other words, they can let wages fall or let the currency drop in value.

Do you really think Americans will elect politicians that force them to take pay cuts? Heck no! So if the guys in Washington want to keep their jobs, they really only have one choice – devalue our dollars further.

As you can imagine, voters pay closer attention to how many dollars are in their paycheck than how much those dollars buy. (In fact, most Americans don’t even understand the concept of the dollar losing purchasing power anyway.)

That’s why it’s almost too easy for Washington to dilute our currency and accomplish their “cheap dollar” agenda.

A Glimpse Into the Future…

So here’s how all of this is going to play out. The U.S. will continue to stack on more debt and dilute the dollar by creating more money. Call it QEIII or just ridiculously low interest rates until 2013, but either way, this can only end one way.

The dollar is sinking in value, and central bankers around the world know it.

Therefore, they are “ever so quietly” shifting their central bank reserves slowly away from dollars and into currencies that aren’t being diluted, that have superior fundamentals.

Some, like China and India, are even buying up commodities for their reserves (like gold, silver, iron ore, etc.).

This practically guarantees there will be a constant shift away from dollars through the years – especially as our politicians believe the quick solution is “dollar dilution.” But no country in history ever brought themselves to prosperity by continually diluting their currency.

Therefore, you won’t really be able to “protect your dollars” because of the government’s overall agenda.

So what can you do? Well, you can protect your money – your wealth – by taking your money (dollars) and investing them in other currencies that aren’t playing the debt-stacking, currency dilution game.

You can also buy the traditional forms of “hard money” including gold.

Dollars…On Sale…50% Off!

Now remember when I said that our currency will have to be diluted even further?

One well-respected hedge fund manager ran the numbers and said that the dollar would have to be devalued by another 50% to make us competitive with the world again.

That means, if you’re paying $5 for your Starbucks coffee…you’ll be paying $10 in just a few short years. If you’re paying $400 for your car payment now, better get used to $800 payments.

Do you think “wage growth” is going to keep up with that? Hardly!

In fact, Ben Bernanke flat-out admitted last year that it will likely take five years or more to get our unemployment rate back down to 5-6%.

So if there is a glut of unemployed people, there’s no need for employers to raise wages when there’s an everlasting supply of employees willing to work for peanuts.

So the bottom line is: you’ve got to get positioned into currencies that aren’t “singing the same tune” as America.

That includes places like Switzerland, Norway and Singapore. All three have stronger currencies that can shield you from the dollar’s long-term destruction, and even provide some measure of safety as stocks drop.

So before the greenback devalues another 50% over the upcoming years…shift into something that will retain its value and grow through the years. And do it while the buck is still worth something!

Have a Nice Day,

Sean Hyman
Editor, Currency Cross Trader

Taps for the Dollar

green dollar sign

By Michael Pento, Senior Economist at Euro Pacific Capital

It now appears that the United States has finally succeeded in its efforts to destroy confidence in the U.S. dollar. Given the currency’s reserve status, its ubiquity in financial markets, and the economic power and political position of the United States, this was no easy task. However, to get the job done Washington chose the right man: Fed Chairman Ben Bernanke. Thanks to Bernanke’s herculean efforts, investors across the globe have now been fully weaned from their infantile belief that the U.S. dollar will remain the ultimate safe haven currency.

The proof of Ben’s success can be seen in comparing how the foreign exchange markets reacted to the recent crisis in the Middle East with how they reacted to the financial crisis of 2008. Back then, investors looking for safety abandoned their foreign currency positions and piled into the U.S. dollar (the market for U.S. Treasury Bonds in particular). As a result of these fund flows, the U.S. dollar surged 20% from August to November 2008.

However, during this latest round of global destabilization the dollar experienced no such rally. In fact, the greenback shed about 5% of its value since the Tunisia revolution began in December of 2010. The reason should be clear; the Fed has placed international investors on notice that it will unleash even greater doses of dollar debasement at the first whiff of additional economic weakness, deflation threat, or dollar appreciation. Just this week, Bernanke once again made clear that despite what he considers to be a better growth outlook at home and abroad, and spreading global inflation, the United States will not pull back from monetary accommodation, even as other nations conspicuously do so. The architect of U.S. monetary policy has stated explicitly that dollar debasement will continue for the indefinite future.

Knowing this, why would any international investor seeking a “safe haven” choose to park assets in U.S. sovereign debt? If Bernanke is to be believed, continued economic weakness in the U.S. will cause low-yielding Treasuries to lose value due to inflation while the weakening dollar erodes the underlying value of the bond in real terms. This is a one-two punch that sane investors will seek to avoid. It is no coincidence that a record percentage of U.S. Treasury auctions are now being bought by central banks, for whom sanity is a lowly consideration.

But in reality, the Fed has much less influence over the dollar’s value than do central bankers in Beijing. There is little disagreement among economists that without Chinese support, the dollar would be a dead duck. But for the last twenty years or so the monetary arrangement that pegged the yuan against the dollar served the interests of both countries. The U.S. enjoyed a flood of cheap imports, the benefits of ultra-low interest rates, and a strong currency. The Chinese received a booming export economy, which accounted for about a third of the country’s GDP, and the ownership of a significant portion of the future of the United States. To maintain this peg, the People’s Bank of China had to print trillions of yuan and perpetually hold more than $1 trillion U.S. dollars in reserve.

But recently, having led to rampant money supply growth and inflation in China, the peg has become more trouble than it’s worth, particularly from the Chinese perspective. The latest reading on YOY money supply growth has China’s M2 increasing by 17.2%; which has helped send their reported CPI up 4.9% YOY.

Inflation in China is pushing up the prices of its exports. According to the latest survey released February 14th from Global Sources (a primary facilitator of trade with Greater China), export prices of various China products are likely to increase in the months ahead, especially if the cost of major materials and components continues to soar. The survey of 232 Chinese exporters revealed that 74% of respondents said they boosted export prices in 2010. The U.S. Bureau of Labor Statistics reported in early January that its China import price index rose 0.9% in the fourth quarter after holding steady for the previous 18 months. And Guangdong, the biggest exporting province, said recently that it would increase minimum wages by around 19% this March.

But here is the rub; China maintains its peg in order to keep export prices from rising in dollar terms. But the peg is now causing export prices to rise anyway. As a result, the policy is a dead letter. The simple fact is that the threat to China’s exports will exist whether they let their currency appreciate or not. But a strong currency offers the benefit of greater domestic consumption, while a weaker currency offers nothing.

The Chinese government will take the path that preserves and balances their economy while enriching their entire population, rather than go down the road to never ending inflation. For China the realistic hope is that the greater purchasing power of a strong currency will enable their growing middle class to supplant U.S. consumers as the end market for China’s own manufacturing efforts. However, for the U.S. the challenge will be to develop a diversified manufacturing base in an expeditious manner before surging interest rates, a plummeting dollar and soaring inflation overwhelm the economy.

The dollar’s recent reaction to the turmoil in the Middle East and China’s inflation problem illustrate that we have come to a watershed moment in American history. The decade beginning in 2010 should prove to be the decade in which the U.S. dollar loses its status as the world’s reserve currency. As bad as that blow may be, the loss may provide the shock needed to get our economy back on a sustainable path. The real danger lies in refusing to adapt to the changing environment. Our current economic stewards are acting as if the dollar’s status is written in stone, when in fact it’s hanging by a thread.

Subscribe to Euro Pacific’s Weekly Digest: Receive all commentaries by Peter Schiff, Michael Pento, and John Browne delivered to your inbox every Monday.

I’m No Dollar Permabull. I Just Go with the Facts!

green dollar sign

by Bryan Rich

Bryan Rich

I’ve given plenty of arguments in my Money and Markets columns over the past couple of years as to why I think the pontifications about the dollar’s demise are greatly exaggerated. The fact is, the dollar is still with us! And it’s been trending higher against a basket of most widely-traded currencies since the global crisis erupted.

Make no mistake: I’m not a permabull on the dollar. I simply side with the evidence. And on a relative basis, given the scale of global economic problems, the dollar is still a front runner in the least ugly contest.

Here are three reasons why …

Reason #1:
Money Is Moving Out
of Emerging Markets …

The wave of monetary policy tightening in the emerging market world is threatening a sharp slowdown in what has been a refuge of growth in the midst, and wake, of one of the worst global economic downturns on record.

With the writing on the wall, stocks in these markets have rolled over. Several have already visited double-digit loss territory for the year — including the likes of Chile, Indonesia and India.

And capital has moved away from these countries in favor of the developed markets — the precise opposite flow most experts were expecting for 2011. In fact, the weekly outflows in emerging market ETF’s hit record levels earlier this month.

With that, I think the dollar has the fuel to make its next leg higher. And I think it can go a lot further and extend a lot longer than many people expect. Especially when you factor in that the U.S. is expected to outgrow the UK, Japan and the euro zone this year by nearly 3 to 1.

Meanwhile market interest rates in the advanced economies have screamed higher in recent weeks, but the impact has not yet been felt in the dollar.

Reason #2:
The Dollar Is Losing Merit
as a Funding Currency …

Both the Swiss franc and the Japanese yen were the most widely-used funding currencies when the carry trade (i.e. borrowing low yielding currencies to fund the purchase of high yielding currencies) was at peak popularity.

This is because, while most global short-term interest rates were near or well above 5 percent in the late stages of the global credit boom, interest rates in Switzerland and Japan were still closer to zero. And that made it most appealing to borrow Swiss francs and yen to fund highly leveraged carry trades.

But with other developed-market interest rates scraping along the bottom in recent years, there have been other alternatives to fund carry trades — namely U.S. dollars.

Now that is changing …

As market interest rates have risen across the board in recent weeks, and as the bond markets have begun pricing in more risk and more inflation pressures, so has the appeal of higher market interest rates in the U.S. — like a 10-year Treasury sniffing toward 4 percent.

Consequently, we’re seeing the early stages of the “carry trade of old” return. And this dynamic has been most clearly expressed in the dollar/Swiss franc and dollar/Japanese yen exchange rates.

The dollar has broken eight-month downtrends against both the Swiss franc and the Japanese yen. And given the Swiss exposure to European sovereign debt crisis and Japan’s problematic fundamental outlook, this trend break for the dollar could prove the early stages of a long-term trend change.

Reason #3:
The Charts Confirm the Dollar
Is in a Good Spot to Buy

When we hear a report from mainstream media on how the dollar is faring, it’s typically a reference to the trading performance of the dollar index. While currencies are only valued on a relative basis, against the value of another currency, the index is a gauge of how the dollar stands against a basket of widely traded currencies — namely the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.

You can see in the chart below that the cycles on the dollar index tend to last around 7 years on average. And based on this history, the cycles continue to argue the buck is less than half-way through a bullish cycle. To be sure, it’s been a choppy one.

But the dollar continues to trend higher, making higher lows along the way. And I think we can see a new high in this cycle this year. That’s 15 percent higher from current levels.

Long Term Dollar Cycles

For more perspective, the following weekly chart going back to the failure of the Bretton Woods system shows the historic bottoming formations in the dollar over the past 40 years.

This chart is designed to look back and see what happened to the dollar in the past when the chart pattern looked like it does now. You can see the slope of this current uptrend (in the green box) is consistent with prior bottoms, particularly the bottom in 1978 (the white box), which initiated a big bull cycle in the dollar.

Dollar Index Weekly

Finally, the next chart shows the last two, dollar cycles. You can see the key channel support for the dollar (the red channel), which presents an extremely attractive low risk/high reward place to buy dollars.

Dollar Index Weekly

So when you add it up all the evidence, despite its naysayers, and the avalanche of challenges surrounding its future, the dollar is looking more and more appealing to global investors.



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