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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Disclaimer: This report may contain information on investments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this communication ...

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Gary Anderson 4 months 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 4 months ago Member's comment

Yes,I agreed Gary. Kurt Kallaus, can you answer that question?