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This week’s report isn’t necessarily actionable in the sense that last week’s strength in the US Dollar is particularly meaningful for the greenback’s prospects…. At best the Dollar is range bound and I don’t believe the longer term prospects are good.
The significance of a higher Dollar is what it means for risk assets. In essence, a higher Dollar means risk assets should underperform going forward.
Technically, we note that the Dollar Index had been flirting with closing below 3 key pivot points. Per my methodology, a close below 3 key pivot points would have signaled the start of a new down leg or a new downtrend. Historically, such occurrences have been bearish for the Dollar and this is seen with other asset classes as well. Last week’s upward move in the Dollar seems to put that event off a bit for now.
Has the Dollar found a floor? At best, we know where the important level is. A weekly close below the key pivot point at 79.11 would be the start of a new downtrend.
Interestingly, this daily chart of the PowerShares DB US Dollar Bull ETF (symbol:UUP) shows a double bottom at least on a short-term basis. This is how uptrends start, but I don’t see this leading to anything much for the Dollar. Maybe prices will make it back to the 200 day moving average? Of note, the UUP last peaked at this level and on November 16, 2012, which was the exact week that equities bottomed. Of course, this coincided with the recognition that more “can kicking” policies such as QE4 and a fiscal cliff resolution would be in our future. Of course, our policy makers delivered right on schedule.
This past week Mario Draghi and the European Central Bank held key lending rates steady, but he hinted at his displeasure at a rising EuroDollar. This sparked a sell off in the Euro and strength in the Dollar. More importantly, it brought forth the notion that currency wars are in our future as a rising Dollar is not what the Federal Reserve wants. As one commentator put it: the currency wars are just beginning. It is a race to the bottom.
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