With most observers either negative or very negative on the U.S. Dollar, we wonder whether a counter-trend rally in the greenback might be in the offing. The long-term trend remains down, but a descending wedge formation (a technical configuration which usually resolves to the up side) is forcing us to consider what could happen next for the buck.
The WSJ notes this morning that one source of pressure on the dollar is US investors penchant for overseas bourses: "As U.S. investors chase profits overseas, there may be an unintended
consequence closer to home: pressure on the American dollar."
After the Bank of Japan left rates unchanged last week, the yen fell versus the dollar (Japan’s 0.50% rates are the lowest in the world). Some traders have suggested the euro has topped out for now, due to technicals and position-trimming."
Carl Swenlin’s chart below shows a short term buy signal. Note that the price index has broken above the its short-term declining trend line.
Swenlin notes: "Bottom Line: Let there be no doubt, the trend is down in both the medium- and long-term (our trend model is still bearish on the dollar), and it is too early to assume that a change in trend is taking place; however, there are plenty of reasons to begin nursing some positive expectations."
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Sources:
DOLLAR TRYING TO TURN UP
Carl Swenlin
DecisionPoint, May 20, 2007
http://www.decisionpoint.com/
U.S. Investors’ Overseas Bets Dent Greenback
Quest for Stronger Gains Leads to Weaker Dollar; A Self-Fulfilling Cycle
JOANNA SLATER
WSJ, May 21, 2007
http://online.wsj.com/article/SB117969793758608877.html
Dollar Looks Set to Move Up
DAN MOLINSKI
WSJ, May 21, 2007
http://online.wsj.com/article/SB117970632855709045.html
here is another take on the “capital flight” :-)
http://tinyurl.com/26eqdv
Question? What happens to the US Dollar if Asian equity bubble collapses some time in the next 1-2 years?
Hard to argue these markets are not frothy after seeing such growth over such a short time. One thing I learned over the years, is that the good times NEVER last forever. Especially if its global and a good 3-4 years into the run.
I would assume the US dollar will get hit as well?
Urban you may be right. I usually find that much of my analysis is sentimental and I too see some sideways/downside action for foreign equities sometime in the near future.
This is all that is necessary to bring billions of USDs home. The real question would then be where Americans will be putting all that cash. If they end up in the stock market we’ll have an equity rally. If they end up in goods themselves then I guess we’ll have higher CPI (or an asset rally – depending which side you’re on).
Kuwait Dinar was just unpegged from USD, what does this imply for the dollar, if anything?
During the recent extraordinary climb of the stock market, the Consumer Discretionary
Sector failed to reach its February high.
I believe that this is indicating a change. The US Economy is heavily influenced
by the consumer-oriented sectors. This change suggest lower Profits Margins ahead.
Factors contributing to profits such as reluctance to hire, a soft US Dollar and
a steadily rising Capacity Utilization will slow or reverse their contribution.
The squeeze on profits put by higher commodity prices will soon be felt.
To get a perspective go to:
http://wrahal.blogspot.com/2007/05/lower-profit-margins-ahead.html
I believe that the dollar has entered a new trading range (low 80’s) and will chop sideways.
“here is another take on the “capital flight” :-)”
Exactly. When I make my investment decisions do I look for the same old Dells, GEs, IBMs? Of course not. Where are they putting their money? They are investing in China, India, anywhere but the US. If it is good enough for them it is good enough for me, except I do not need them as my middleman.
So jmf has it right. The US market has gone nowhere for 6 years (maybe a little the last few months), and we are in an auto depression, a housing depression, a lending crisis, while overseas the outlook is strong.
In the US we lose our jobs and have less money to spend. Overseas, they get the jobs, have more money to spend, so that is where I put my money.
Wow!!
Fred you are really going out on a limb there:
http://stockcharts.com/h-sc/ui?s=$USD&p=D&b=3&g=0&id=p77551666975
Wake me up when you actually have something to contribute that is’nt so obvious.
Sheep
Ciao
MS
While this is a touch off topic, this community might find it interesting that the Fed has reported that banks have not tightened lending (to corporations) at all…in fact the opposite is happening.
Tony Crescenzi on RM writes, “Commercial & industrial loans increased $5.3 billion in the week ended May 9 to a record $1.234 trillion. The previous week’s gain was $8.9 billion. Year-to-date, C&I loans have increased at a 10.6% pace, a slower pace than last year’s 13.8% and the previous year’s 12.7%, but still very strong historically.”
This is important to my thesis that enterprise capex will step up to the plate and spend that borrowed money, on more than just stock buy backs. Yes the consumer is slowing, but corporations plan on picking up the pace of spending.
>>Yes the consumer is slowing, but corporations plan on picking up the pace of spending.>>
How many years have we heard that CAPEX will rescue us?
Wolf!
CIao
MS
MS – The broad trade weighted index sheds a somewhat different perspective.
IBM didn’t announce any capex, just borrowing $15 Billion to buy back stock.
Estragon,
Please elaborate.
John – My understanding is that the USD as shown in the chart MS referred to compares the USD to a few of the big, liquid, major world currencies. Although it’s easy to calculate and refer to, it doesn’t necessarily reflect the underlying trade dynamics driving currencies over the long term. For example, CAD isn’t really a major world currency, but Canada is the US’s largest single trading partner.
Looking at the USD chart supports the notion of the USD in a trading range (around 80-85) for the last few years. Looking at the broader index though, suggests a series of lower highs and lower lows for the last few years.
Comparing the two over a much longer period presents an even more interesting perspective. The USD chart shows a modest decline over the last 30 years, punctuated by countertrend rallies in the mid 1980’s and around 2000. The broader index shows a more or less continuous uptrend from the mid 1970’s to around 2000, and a more or less continuous downtrend since.
You can see the two here .
FWIW
Interesting stuff. Thanks.
Estra,
VERY interesting charts…thanks.
Here’s my 2 cents — the Trade weighted chart shows nowhere near the retreat in the $$ as compared to the “major currencies (DTWEXM)”. That chart line (blue one), shows a round trip from the lift it got as the Emerging market currencies collectively collapsed, in the mid 90’s. So all the talk of the “imploding dollar” is really punk spin. As those economies improved, their currencies did as well (vs the dollar)…does that NOT make sense?
That’s why I think the $$ will now be in a much tighter trading range than it has seen in years (low 80’s).
The Trade Weighted chart also throws cold water on the over hyped arguement that the dollar is at risk of a collapse. Not gonna happen.
Fred-
Or maybe the trade weighted index shows the effects of currency pegging by trade partners, leading to your observation of “nowhere near the retreat”. Now if the pegging were to stop….