The Dollar Will Rise

My proprietary timing indicator has just given a buy signal for the U.S. Dollar Index. In the midst of many prophecies for a collapsing dollar in 2007, the Dollar Index has quietly risen from its December low of 82.35 to the current level of 85.28, and I am projecting that the index will rise to at least the 87 level by February. There is likely to be resistance at 87, but if that is overcome, the index could rise to 90 by June.

The major currencies have been strong against the U.S. Dollar Index until recently, with the exception of the Canadian Dollar. As this chart indicates, the Loonie has been in a downward spiral of its own since November, due in large part to the sharp decline in the price of oil.

A rising dollar implies that U.S. short-term interest rates will not be cut in the near future and that they could increase. A rising dollar would reduce the cost of goods imported into the U.S., but it would also mean less demand for goods exported from the U.S. and lower profits for the big American multinational corporations.

If some unexpected geopolitical event should disrupt world oil supplies, an attractive speculation for U.S. investors would be to immediately buy the Claymore Oil Sands ETF [CLO.TO], traded on the Toronto Stock Exchange, to achieve double benefit from the rising oil price together with the Canadian Dollar appreciating against the U.S. Dollar.

Comments

[CrossProfit:]

“A rising dollar implies that U.S. short-term interest rates will not be cut in the near future and that they could increase.”

The exact opposite is more likely. Increases in Dollar interest rates will only exasperate the Dollar’s rise. On the other hand the current trend will allow the Federal Reserve to cut rates without fear of a downward spiral. This in turn will further the reduction in the U.S. trade deficit as the Federal Reserve is not interested in the Dollar getting ahead of itself (= strong Dollar).

The minor correction in exchange rates are due to economic comparisons with the economies of the other major currencies, notably the EU, where relatively speaking the U.S. is not as ‘bad’ as perceived three months ago. Bears would put it differently and say that the EU economy is not as ‘good’ as it was thought to be. Either way you put it; macro economy comparison is dictating the exchange mechanism and not the anticipation of a Dollar interest hike. M3 is still a problem.

The assumption that upon occurrence of a major political event, oil spikes and simultaneously the Dollar falls is flawed. In most instances in recent history the U.S. Dollar has served as a shelter during times of upheaval or uncertainty. Naturally each scenario dictates different outcomes and strategies.

Sorry Alligator but we take a different bite on this one.
CrossProfit

2007 Jan 14 02:50 PM