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U.S. Dollar Rallies, Will It Fade?

May 11, 2011 10:18 AM ET
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 The U.S. Dollar Index(DXY) is trading higher this morning by 0.24 cents to $78.85 per contract. As we all know by now, when the DXY is trading sharply higher the major stock indexes will usually trade sharply lower. That is exactly what is happening this morning. The problem with the DXY is that when it trades higher in the morning it will often make a high and usually fade throughout the rest of the session. As soon as the U.S. Dollar Index declines intra-day the major stock indexes will inflate and trade higher again. The same effect will be seen in most of the leading commodities such as oil, gold, silver, gasoline, and copper. In other words if you can control the dollar you can control the stock and commodity markets.

There is really only one institution that we know of that can really move the U.S. Dollar Index and that is the Federal Reserve. Since the Federal Reserve announced its quantitative easing program in late August 2010 the U.S. Dollar Index has declined sharply. In fact, since June 7, 2010 the U.S. Dollar Index has dropped by as much as 17.0 percent. If the DXY falls everything else in the stock market trades and inflates higher.

This week the U.S Treasury is auctioning off almost $100 billion in new bonds. Therefore, the it is usually easier to sell those notes if the U.S. Dollar Index strengthens. Is the recent five day climb in the U.S. Dollar Index(DXY) just another propping stunt by the Federal Reserve and the U.S. Treasury so that foreign governments will buy our bonds? We shall see. In any case the DXY is trading higher today and that can only mean that the major stock indexes will be under pressure as long as the dollar trades higher.

Nicholas Santiago

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