U.S. Dollar Supported by Fundamental Conditions, but Technically Overbought 16 comments
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Fundamental factors influencing the dollar are the global economy, geopolitical risks, and natural disasters. Global economic weakness reduces oil demand and energy prices, which buoys the dollar. Hurricane Gustav so far has spared Gulf Coast residents and refiners the worst possible outcome as the storm was downgraded to a category 2 level. On September 1, oil closed down -$4.35 to $111.11. Gustav was discussed in an earlier posting as a potential catalyst for higher oil prices. Even though this natural disaster threat is removed until the next hurricane warning emerges, the geopolitical risks between Russian & the West and Israel & Iran still exist.
Gold, "the other currency", trades in sympathy with energy and interest rates which are both trending downward. Economic weakness in Europe is forcing the ECB to retreat from its hawkish posture and ease rates along with the BOE. Meanwhile, the Fed is entangled in its own set of systemic risks and unofficially on pause until the the conclusion of the 2008 presidential election. Whenever the Fed eventually decides to modify the current rate policy, the next move probably will be an increase.
The dollar’s primary or long-term trend has been down for almost the past 8 years, but in August it made a huge upward reversal to start what appears to be a bullish retracement. An initial 38% retracement move would take it up to the 90-91 range if it is able to break through resistance levels @ 80 and 84. However, the downward trending upper channel line needs to be broken in order to confirm the possibility of such a move (see Chart #1).
Intermediate-term analysis shows the dollar has made a hyperbolic move even for a weekly timeframe. Stochastics indicate it is extremely overbought and MACD is diverging negatively from the current price action (see Chart #2). Resistance is @ 77-78.
In the short-term, the dollar is consolidating but extremely overextended and showing signs of exhaustion on weaker MACD. Any near term upward move in the dollar, e.g. as reaction rally to Gustav’s downgrade, would likely take it right back into overbought territory. Meanwhile, the 50 day sma is trending upward in an attempt to cross above the 200 day sma. Should it succeed and sustain itself, the long-term implications are bullish (see Chart #3).
Summary Analysis: Natural disasters such as hurricanes are seasonal and their risks literally change like the weather but dissipate with time towards the end of the season. The market is currently reflecting more concern with global economic weakness and risks of geopolitical and military conflicts by which either supports the case for a higher dollar. If any of these risks morph into biblically diluvian proportions, then gold would become the preferred currency of choice and all bets on the dollar are canceled.
From a technical perspective, it would be extremely unusual and almost unprecendented for such a hyperbolic move in a currency to sustain itself without some sort of correction and consolidation. As contrarians, we tend to favor the technicals which reveal a subtle decrease in weekly momentum but will ride the dollar while the intermediate trend remains up. A break downward in the short term trend would shift our position to neutral while the violation of the intermediate trend would convert us to sellers regardless of the current fundamentals.
Chart #1
Chart #2
Chart #3
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This article has 16 comments:
Still looking for a good article that explains the fundamentals that underlie the strength of USD. Still not finding one. I am starting to think that it must be the US military, because the economic underpinnings of USD are just plain horrid.
These are the words that are supposed to be in line one above. For some reason SA cuts off words with multiple periods after them
NOT. the fundamentals are horrendous and getting worse daily with the derivatives crises.
don't mind me, i'm sitting out the dollar "strength". manipulation/intervent... never works in the long run. here, i don't think we're even going to have to wait til the end of the year for the long run to arrive.
The move will continue up until there are some signs of Russian troop withdrawals or the scheduling of talks with Russian Leaders. Weakness could take the Dollar back down to the breakout point but I expect the War Premium Factor will continue to weigh heavily for the foreseeable future.
Overbought/sold markets can stay that way indefinitely.
the military expenditures and deficit spending have been a huge albatross for the dollar... ironically the geopolitical destabilization wrought by u.s. foreign policy would tend to create a flight to safety mentality and lend support to the dollar.... if there is a change in administration, i.e. democrats win, then i think the dollar would be set free to fly as the nation re-prioritizes its fiscal expenditures....
a currency represents a store of value, just like oil, gold, other commodities, real estate and stocks... capital needs to find a home & smart money buys low and not when it's common knowledge that things are okay.... imho
Inflation in prices can be measured by the amount of change in the price of that board foot of that cut of oak divided by the price of it at some earlier date multiplied by 100 to get a percent reading.
The price of a US house goes up 100 times in 100 years in US $..
Thus, in regard to the particular house discussed above the value of a US dollar fell to 1/100 th of its 100 year ago house buying value in the last 100 years. Of course, not all houses had the same change in sales prices in US $ over the last 100 years.
Take an ounce of gold as a representative unit which is available around the world and see how many US $s it takes to buy it. Did its US $ value move the same way or amount as the house value did? No.
In 1910, gold sold for 19 US $s and now it sells for 900 of them rather than 1900. Of course, it did better than the 100 years old farm house in Michigan which fell over this summer and was carted away in a truck. However, not as well as the farm land that house sat on.
How can all this be going on? Because gold is an item that stores value and the US $ is a measure of an item's exchange rate value at a certain place and time.
So, what happens to the US $ per ounce of gold exchange rate now or next year or etc. How many US $ are outstanding? How many gold ounces are in storage? What are the motivations to hold one or the other? Interest on US $s versus storage fees on gold.
In bad times interest rates go down and dividends go down, so humans are more willing to hold more gold vs US $s.
Good luck.
.
Say you owned Enron 6 years ago vs any hard asset, at least you would have something, other than the ability to offset capital gains.
"Stocks have outperformed every other Asset class over the last 100 years." This is a load of blank. Only the Index has outperformed. Thousands of stocks have gone belly up along the way. Meanwhile Gold would still have retained some value.
The price of houses, cars etc have NOT gone up 100 times. The CURRENCY has been PRINTED 100fold more than what was available 100 years ago. Five trillion dollars has been created out of thin air in the last 7 years alone. This is what inflation is. Prices of "stuff" going up...is the result. Please look inflation in the dictionary.
The hysteria on these comments is nothing compared to the hysteria in the futures trading pits as nearly everything traded in dollars collapses - including currencies.
The trading bubble has popped and traders will take the dollar to about 100 before this is over.
The fundamentals just don't matter here.
Goldbugs, I think you can kiss $800 gold goodbye and welcome $700 gold with open arms.
A few hedge funds are biting the dust, unravelling positions and the rest of the lemmings don't want to be left behind. Quite similar really to SoGens unravelling of equity trades earlier this year which caused the Fed to panic. Commodity Traders can't borrow from the Fed. Kind of biased and fundamentaly stupid since Stock Mutual Funds and Equity hedge funds take their view of the underlyng "fundamentals" and sell related stocks thereby exacerbating the situation.