by winston » Sun Nov 15, 2015 5:08 pm
Undeniably Strong... but for How Long? by Karim Rahemtulla
The U.S. dollar's strength is undeniable. It has left almost every major currency on Earth in the dust over the past four years... and the dollar is showing no sign of weakening just yet.
But one indicator, called the Z-Score, is signaling that the dollar's winning ways may be ending soon. This indicator, which measures the dollar's strength against the six currencies that comprise the Dollar Index, recently hit a level that it has hit only twice before in the past 30 years.
On both of those two prior occasions - in 1982 and 1985 - the dollar reversed course and headed down sharply.
According to the Z-Score calculations, the dollar is currently "overbought" against each of the six currencies in the Dollar Index - the euro, Canadian dollar, Japanese yen, British pound, Swiss franc and Australian dollar. A reading this extreme has not occurred in 30 years. So if past is prologue, the dollar's next major move will be to the downside.
Dollar Danger
Some of the reasons for the dollar's strength are easy to understand. In no particular order, the following factors have contributed to the dollar's strength:
A strong U.S. stock market
A strong U.S. economy, compared to economies in the rest of the developed world
Slowing Chinese economic growth
Quantitative easing in Europe, which helps to hold interest rates well below U.S. rates.
And now, there's one more factor: The likelihood that the Federal Reserve will begin raising U.S. interest rates in December.
There is little question that these factors have been pushing the dollar higher. But there is also little question that speculative trading has been pushing the dollar higher as well.
Investors and speculators have been piling into what has been a one-way "can't lose" trade: buy the greenback and/or sell short any other currency.
But currencies are much like any other investment: When the crowd moves to the same side of the boat, that boat usually capsizes. And judging by how most investments react in today's marketplace, where overreaction is the code of conduct, the dollar could capsize and sink hard and fast, maybe harder and faster than it ever has in the past.
There is precedent for major currencies to sink suddenly. It happened to the euro earlier this year when the Swiss decided to cut the Swiss franc's managed peg to the euro. The franc instantly shot up by more than 20%, which is another way of saying that the euro instantly tumbled about 20% against the Swiss franc.
Z-Scores aside, there are other compelling reasons to expect the dollar to weaken. For starters, the dollar's strength is a detriment to U.S. economic growth. Products made in the USA are no longer cheap to the rest of the world. That means fewer sales and lower profits for U.S. corporations, which could lead to massive instability in the stock market. That's something the Federal Reserve definitely does not want to see and something that would force it to abandon its plan to hike interest rates.
The strong dollar also means that commodity prices tend to be low. That's certainly been true during the last four years, as commodity prices have collapsed. If this condition persists, or worsens, the U.S. economy could become deflationary. And that's something the Fed doesn't want either. Raising rates during a period of slow or no growth is bad enough. To do so in the face of falling prices would usher in a deflationary recession.
So the Fed would probably like to see the dollar weaken from current levels. And it may not take much of a nudge to kick the greenback down a few notches.
You see, the U.S. dollar is not moving higher because of some miraculous solution to the U.S. government's chronic overborrowing and overspending. The dollar is not moving higher because the U.S. has solved problems like labor participation or entitlement spending. It is not moving higher because the U.S. is printing fewer dollars. No, my friends, the U.S. dollar is moving higher because of an orchestrated move by other nations to move their currencies lower.
There is nothing fundamentally sound about that. If you own dollars, consider yourself lucky for now. But if you want to maintain that lucky streak, you may want to look for non-dollar investments that will increase in value once the dollar makes its inevitable turn lower.
Source: The Non-Dollar Report
It's all about "how much you made when you were right" & "how little you lost when you were wrong"