Is the U.S. Dollar About to Crash?

Includes: UDN, UUP
by: Leigh Drogen

By Leigh Drogen

Gregor Macdonald was in the office yesterday and I am always in awe of the way he processes information. As a trader I like to focus on the trend and block just about everything else out. But as a person who generally loves information and learning about the world, it’s hard not to love my conversations with Gregor.

We had the chance to discuss things ranging from what is currently taking place in the Middle East, to resources depletion, to the origins of the name for the band Steely Dan. I also asked him about the US Dollar, specifically, is it about to crash.

(Click to enlarge)

First, as a technician it’s hard to deny that the US Dollar has been in a longer term bearish consolidation pattern for the past 3 years or so. We see a symmetrical triangle after a long term downtrend starting in 2002. At the end of 2010 the dollar attempted to bounce once again from its ascending trend line but was unable to retake the falling 200 day moving average with any force. Each move up was smacked down hard, until the dollar rolled back down to its uptrend line.

Unlike past declines to this trend line, namely in November of 2009 and again in November of 2010, the dollar is not greatly extended to the downside now. From a technical point of view, the threat of a collapse in that chart is greater than at any time over the past 3 years.

But talking with Gregor gave me some really great insight into that chart and how a collapse in the dollar may not actually be reflected there. He noted that in order for the DXY to collapse, the dollar would have to collapse against another major currency or currencies and he wasn’t sure he could see that happening. More likely, the dollar would collapse against a basket of commodities.

We wouldn’t necessarily see that type of collapse in the chart above, but you would definitely feel it, and I agree with Gregor. As our government attempts to print our way to prosperity and plays the game of “fake it ’till you make it”, the value of a dollar against things that actually matter to an economy, namely oil and food, will get hammered.

As a technician I can’t deny that the odds are that chart is headed lower, but I agree with Gregor that it won’t look like a collapse, it will be more of a meandering tumble. I feel a bit lucky that I live in NYC these days where I pay $104 for an unlimited metro card and another 100-150 dollars on cabs a month for all my transportation. I have seen statistics that say most people spend 1/3 of their income on transportation, that just baffles me. I know I’m not insulated from the cost of oil, but at least that mitigates it a bit.

I’m definitely not sheltered from the rising cost of food, but I made a decision long ago to just accept the fact that I like to eat well and I’m willing to spend on it. But I’m lucky and the rest of the world is in trouble right now in regards to food shortage.

The last thing Gregor and I joked about was the fact that people love to come up with crazy conspiracy theories for why the price of oil, food, and other commodities is going up. People need a more complicated explanation than the fact that we’re simply running out of excess oil capacity, we’re quickly depleting global reserves, and we’re just not making enough food for everyone to eat. A wall just came down over the last decade and 2 billion people in China and India have entered the competition for these materials, what did you think was going to happen? Another 300-400 million or so are about to enter from the Middle East. And you can bet it won’t be more than 20 years from now that the African wall falls as well and floods the market with another billion and a half people who want to be part of the modern world.

Don’t make it more complicated than it is, we just don’t have enough stuff right now, and the market is discounting that. Long term, I believe we will find a way to solve these issues, because that’s what humans do when they are forced to adapt. That and the fact that I believe we are on a region of the technology curve where the velocity of innovation is increasing so rapidly that each year will look less and less like the year before it. Technology will solve these problems, but we’re probably in for some very rough times before that takes place.