Investors Appreciating The Dollar

In 1944 the dominance of the US Dollar was codified in the Bretton Woods agreement establishing it as the reserve currency of the planet. The Dollar was the natural choice since the world needed finite Gold backed currencies to prevent excess inflation and the US held 75 percent of the world's gold.  As inflation pressures in the US bubbled up and countries began converting their depreciating dollars to gold, Nixon shut the Gold window by 1973 creating the free-floating global currency system we have today. This removed the forced discipline of fixed currencies, letting the debt and inflation genie out of the bottle. With almost two-thirds of world reserves held in Dollars today, there is no hint of our Greenback losing its dominant status for many years, much to the envy of geopolitical rivals Russia and China. 

With our currency reigning supreme amongst central banks, commodity transactions have been priced in Dollars and move inversely to our currency value. Precious metals such as Gold and Silver tend to be sensitive to Dollar trends which is why they have fallen over the past year while the Dollar appreciated. Our thesis this year has been for a US and China trade deal completion to coincide with a new downtrend in the Dollar and higher prices for precious metals. In the ensuing 6 to 12 months following a trade deal, we expect commodity inflation to push our Dollar into the 88 to 93 zone. While we wait for a trade agreement to initiate these new trends – perhaps in the second quarter – the Dollar remains in an uptrend and could work higher into the 98 to 100 zone. The 95 area is key support.

The Euro comprises 58% of the US Dollar currency basket and just over 20 percent of global central bank reserves. Its large weighting in the Dollar index means it has the strongest inverse correlation of the major currencies relative to the Greenback. The Euro value has faded about 10 percent as the Dollar strengthened this past year. Until a China trade deal arrives, there is a risk of the Euro falling to support near 110. A break higher above the 116 to 117 resistance zone would turn the long term trend higher. With the Eurozone economies weak relative to the US, there has been no reason for fund flows to stop leaving Europe for the safety and yields in the US.

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Gary Anderson 2 years ago Contributor's comment

Fascinating article. I wish the author would have explained why the dollar would weaken in the face of a trade deal when an effective trade deal for the US could weaken China. China cannot continually experience slower manufacturing that a "win" for the USA could bring.

Dan Jackson 2 years ago Member's comment

Yes,I agreed Gary. @[Kurt Kallaus](user:46983), can you answer that question?

Kurt Kallaus 1 year ago Author's comment

Gary, nothing like responding a year after the fact - my apologies due to different forums carrying our publication.

As for Dollar: 1st I will note that the $ peaked near our 102 upside target zone outlined. The China Trade Deal (part 1 that may still fail) took far longer than we expected & while it was underway we felt the $ would remain strong as our economy decelerated into the ongoing global Recession where the US was the strongest performer warranting Dollar/capital inflows. It wasn't as much about trade as it was about the global economic cycle & China is less the issue on the $ than other 1st world trading partners & currency pairs.

What we were waiting for was a "bottom" in the Global slowdown by in late 2019 or early 2020 at the time, that was sadly punctuated by the pandemic in March 2020, which is where the $ peaked (briefly >103). From the late March low a Global recovery has begun, sending the $ lower, which is common in an exit from a Global Recession as global demand on commodities/trade priced in Dollars inflate with a more devalued $ that helps boost the recovery abroad relatively.

The Dollar has now fallen sharply from March & risks dropping under key support near 96 should commodities finally breakout of a multi-year doldrums. Oil & Copper are leading the way higher currently. If the Meats & food crops join the rally, it would be another sign for a recovery abroad gaining traction & lower $ temporarily.