Good afternoon it’s Tuesday January 8 close to noon here in NY. Yesterday I began my 2019 forecast, and I’m continuing with that today.  Yesterday I started with the Fed and where I think they’re going with rate hikes, and today I’ll be talking about the dollar. And let’s remember that whenever I speak about the dollar, I’ll refer to the dollar index unless otherwise stated. The dollar index is just a measure of dollar strength against other currencies, and its mostly the Euro (57.6%), Yen (13.6%), Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%), and Swiss Franc (3.6%). Also the dollar index is just a scale measured over time. The current reading is about 96.

So the dollar index shows some strength and support at the current level of 96-97.  It also shows support from May 2015 at 91-93, but broke below that to 89 in 2018.  There was much stronger support at the 80 level for 3 years prior to that, and the 72-75 level is also key.

For the first few months this year I think the dollar will continue to show strength and maybe even rise slightly.  The current resistance level is 100, and if it pushes past 103 we could see some further strengthening. 

I doubt that dollar will push past 100 very much if it does at all, and while there is always the possibility that the market will completely humiliate me on this call, I just don’t see the dollar going to the 103 handle.

The dollar strength will continue through March when the Fed announces a pause in rate hikes. The pause in hikes will signal that the economy is not as strong as everyone thinks, because if it really was so strong, the Fed could continue hiking without fear of negative consequences.  This will lead the dollar down on the first leg, back towards the 90 reading. It will probably maintain support at that point until the Fed either pauses again in June or lowers interest rates.

Once the Fed is in full swing of lowering interest rates to zero or below in conjunction with reversing asset sales and instead buying assets, that is when it will really hit the fan on the dollar as everyone realizes that the Fed policy of the last 10 years just didn’t work and lasted about 10 years too long.

Americans will need dollars to live their lives, for example to buy groceries and clothing, pay their bills, etc, but the rest of the world will be dumping their dollars in favor of other currencies or real assets like businesses, buildings, and precious metals. And by the way, one of the ways the rest of the world gets rid of its dollars is by selling the US treasury bonds they own, which I’ll get into in another episode.

As far as the time line for all this happening, like I said the first three months will see continued support for the dollar.  By the way, if the dollar would be strengthening from here, that means people would be buying dollars and the dollar index would be rising.  Right now no one is buying.  There’s no selling to speak of either. But anyway, the first three months this year will see continued support, and then the dollar will probably begin to fall.  I don’t pretend to know when it will hit bottom or what the DXY reading will be, but the full extent of that will probably extend well into next year if not further.