Friday, July 30, 2010

U.S. Dollar Target

On July 8 I wrote my last post concerning the U.S. Dollar.  In the last line of that post I said "...I continue to believe the U.S. Dollar is highly vulnerable to a substantial decline."

As "substantial decline" is somewhat open to interpretation, I would like to clarify what I meant.

Here is a chart of the U.S. Dollar on a monthly basis since 1983:

(click on chart to enlarge image)(chart courtesy of

As one can see, the current price of 81.64 is approaching the technically significant 80-level.  This level has served as technical support on a number of occasions.

If that level is broken, there is not much precedence from a longer-term perspective.  For many reasons I doubt that the 70.7 level reached in 2008 will serve as any type of significant technical support.  Below the 70.7 level is obviously a "new frontier" with no obvious strong technical support.  In essence, from a technical perspective the downside would appear rather open-ended.

From a fundamental perspective, a substantial dollar decline appears likely as well.  As I wrote in my January 13 U.S. Dollar post, "Many people, especially those of the “hard money” and “Austrian” philosophies, have long held that many of the actions we (as a nation) have been taking to combat our current period of economic weakness would unduly pressure the dollar.  These actions have included very low interest rates, truly outsized interventions (including “money printing”) and deficit spending."

Additionally, I would like to address one comment I have repeatedly heard regarding the U.S. Dollar.  Many people believe that the U.S. Dollar is (still) a "safe haven" as it has increased in price during The Financial Crisis of 2008-2009 as well as market turmoil during this year.  As such, this purported continual "safe haven" status is supposed to support the idea that the U.S. Dollar is strong fundamentally.

While I see the reasoning behind this logic, I don't believe that this logic or interpretation of recent upward Dollar movements is correct.  Many complex factors impact the price movements of the U.S. Dollar, and I wouldn't assume that just because it has recently increased during periods of market stress that it will continue to do so.

In summary, I continue to believe the U.S. Dollar is highly vulnerable to a substantial decline.  This decline has the potential to be rather open-ended in nature, as supported by both technical and fundamental factors.  Once the 70-level is broken, the U.S. Dollar decline would likely become very pernicious and levels of 50, as well as substantially below, should be considered possibilities.

Should such a U.S. Dollar decline occurs, this currency weakness alone would create an entire new set of severe economic problems and challenges.

back to home

SPX at 1113.68 as this post is written

1 comment:

  1. Decline vs. what? The Euro? Gold? Avoid the $ collapse by trading your currency for shells and beads before it's too late, is that your suggestion?

    Hail the QE don't kill it. The US is trading it's newly printed Treasury bills for newly printed Fed cash, and paying no interest. Thomas "the light bulb" Edison:

    "People who will never turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the people who supply all the material and do all the work. This is the terrible thing about interest...but here is the point: If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution, pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People. If the currency issued by the People were no good, then the bonds would be no good, either. It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charge at the hands of men who control the fictitious value of gold. Interest is the invention of Satan." -Thomas A. Edison