U. S. Dollar is Hanging by a Thread.. and That's a Good Thing

Posted by jbrumley on January 23, 2018 5:17 PM

It's good news for anyone who owns oil or gold (or gold and oil stocks), and it's good news for anyone who think the U.S. sends too much money overseas in exchange for goods not made in the U.S.A. For everyone else though, it could be trouble.

It's the United States dollar being discussed, of course. With Tuesday's weakness, the greenback is on the verge of a key technical breakdown that could extend what's already been a 13% pullback since the beginning of 2017 (a huge move by currency standards).  One more rough day could do the trick.

This is a case where a little perspective helps before embracing the nuances of the slow implosion, so we'll start with the bigger-picture weekly chart of the U.S. Dollar Index. Thanks to last week's stumble and this week's follow through, the last-ditch support line that tagged all the major lows going back to mid-2015 has been broken, allowing the dollar to reach new multi-year lows.


Perhaps worse, the dollar's meltdown is happening for all the wrong reasons... sort of.

In general, bond yields and the value of a nation's currency rise and fall together. With interest rates in the United States on the rise, the greenback should theoretically be gaining in value.  It's not. Why? Because other factors are in play -- like other countries' currencies -- but more than anything this is part of the great disconnect of yields and the dollar to undo the dollar's unmerited rise in 2014 and 2015 when yields in the United States weren't rising. They were supposed to, but they didn't. Now they are, but the dollar still overshot then and as a result still has ground to give up now.

There will be a "middle ground" that comes into play before the U.S. Dollar Index is allowed to fall all the way back to the 2014 low around 80.0. Unfortunately, that middle ground is also still somewhere below the current value of around 90.0.

That's long-term perspective on the dollar anyway. There are more pressing short-term matters. Namely, the newly-defined low of right around 90.0 is under attack again. If it breaks, look for the selling floodgates to open.... not unlike they did earlier this month when the floor at 91.80 failed. A move to 89 -- and maybe even lower -- could be in the cards.


Even if the selloff pauses there though, there's no assurance that will be the end of the major selloff we need to bleed off the 2014/2015/2016 froth.

Even beyond ForEx trading, this breakdown has implications. It was the U.S. dollar's unfettered rally in 2014 that up-ended the oil industry, and made life pretty miserable for gold miners as well. Both commodities are on the mend, largely thanks to the greenback's weakness.

This pullback from the U.S. Dollar Index is also good news for U.S. exporters. They won't reap the benefit as quickly as the gold and oil industries will, if only because foreign customers remain hesitant to start buying from U.S. suppliers again with no assurance that the dollar's going to remain this weak. In light of how much momentum the dollar's downtrend has mustered though, those would-be customers overseas are starting to rethink things.

it's only a potential breakdown at this point, and certainly not one you'd want to trade blindly. Even if it does take shape, it's a trade that would require day-to-day monitoring as the fundamental backdrop isn't generally pointing in a bearish direction. Then again, the market has a way of defying logic.