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Page added on November 16, 2015
Protect Assets With The Dollar
Summary
A strong bull market.
Fundamentals say higher, much higher.
Technicals say the trend is your friend.
A Fed promise kept will launch the greenback.
Parity and more.
The U.S. dollar is the reserve currency of the world. While the total population of the United States currently stands at around 322 million, the world population is 7.285 billion. The United States has 4.4% of all people on earth within its borders, however, its currency is widely accepted as the ultimate means of exchange around the world.
Over recent decades, there have been times when the rest of the world questioned the future dominance of the dollar. I remember working on the trading desk at Phibro in the early to mid-1990s when the dollar was under pressure. Some major oil-producing nations around the world, including Saudi Arabia, began questioning the role of the dollar. At one point, in 1995, the Saudi oil company, Aramco, began questioning whether the greenback could continue as the pricing mechanism for world oil. A rally in the U.S. currency that followed quieted the calls for a replacement of the dollar. However, the value of the dollar has important consequences for commodity producers and traders around the world. Recently, the dollar has been back in focus, however, this time it is the strength and volatility of the currency that has been causing issues for assets and certain nations around the world.
A strong bull market
Last week, the dollar index made a higher short-term high on Tuesday when it traded up to 99.60 on the active month December futures contract. On Wednesday and Thursday, it corrected a bit. During the period of the correction, statements from the ECB President Mario Draghi indicated that the dove on interest rates is becoming even more dovish. In what was likely a delayed move, the dollar index rebounded on Friday, November 13 to close the week at over 99 once again.
While the dollar closed the week marginally lower, it remains in a strong long-term bull market that began in May 2014 at 78.93 on the then active month dollar index futures contract. (click to enlarge)
As the monthly chart illustrates, the dollar appreciated by over 27% between May 2014 and March 2015. After a six-month period of consolidation, the dollar is now threatening to make new highs above the 100.38 level.
Fundamentals say higher, much higher
The dollar has very strong fundamental underpinnings these days. The most compelling case for the dollar is the divergence between interest rates around the world. While the rest of the world continues to attempt to stimulate economies by lowering interest rates, that has come to an end in the United States. In fact, interest rates in the U.S. will eventually rise from current levels. Global interest rates remain at very low historical levels and on a comparative basis, the yield of the U.S. dollar is more attractive than other currencies.
The European economy continues to stagnate. The sanctions on Russia have been difficult for Europe, as have the cultural differences between northern and southern Europe. Bailouts of countries like Greece, high levels of unemployment and a growing humanitarian refugee crisis will continue to present problems in terms of future growth. The policy of quantitative easing, introduced earlier this year, will continue until September 2016. However, all signs point to an extension beyond that date and more attempts to jump-start the economy on the continent.
Meanwhile, the Chinese economy is still growing, but that growth is far below levels that the world had become accustomed to and expected. This has weighed heavily on the economies of nations that depend on China as a reservoir for sales of raw materials. This has presented tremendous issues for Brazil, Russia, Australia, Canada and the economies of other nations that are reliant on revenues from raw material sales. The current state of the global economy has meant lower lows for commodity prices, causing conditions that continue to deteriorate.
All the while, the U.S. economy continues to experience moderate growth. The latest employment report was a positive and even indicated an increase in overall wages. The U.S. economy is alone in the world in terms of the jobs picture as the nation is facing full employment. Granted, the way employment is measured is questionable. What the government data does not include is those who are underemployed or those who have dropped from the numbers due to long-term unemployment. However, given the numbers, the dollar does remain, “the best horse in the glue factory” when it comes to a comparison with other currencies around the world. This has created a fundamental picture that favors the dollar over other currencies and will continue to support the U.S. currency for the medium-term future.
Technicals say the trend is your friend
From a technical perspective, the dollar is now back above the August 2015 highs and appears to be set to attack the March highs at 102.45 on the active month December futures contract. (click to enlarge)
As the daily chart illustrates, the dollar has been moving higher once again since it traded close to the bottom of its post-March 2015 trading range on October 15. Open interest, the total number of open long and short positions on the dollar index futures contract, has increased from 65,291 contracts on September 15 to 87,135 contracts as of last Friday. While the dollar has appreciated by 3.5% over that period, open interest in the greenback has increased by 33.5%. Increasing open interest accompanied by increasing price is a bullish technical signal for a futures contract. The trend is certainly a friend of the longs in the dollar today. The fundamentals for the currency could mean that the U.S. central bank is preparing to fulfill a long-term promise to markets before the end of this year.
A Fed promise kept will launch the greenback
For the better part of a year now, the Chairperson of the U.S. Federal Reserve has promised markets the first interest rate increase in many years in 2015. So far, the Fed has not yet announced “liftoff,” which will raise the short-term Fed Funds rate. In stalling, they have pointed to inflation below the target 2% level, a strong dollar and weak global economic conditions. There has also been pressure from other nations around the world as well as supranational institutions. The International Monetary Fund has been vocal in lobbying the Fed to keep interest rates in the U.S. low. However, recent data showing moderate growth and employment and wage gains has increased banter from the Fed that seems to indicate that they are ready to act. The Fed’s back is against the wall in terms of keeping their promise; the December meeting is the last chance for the central bank to be true to their words.
Recently, even the whiff of a Fed “liftoff” has caused the dollar to rally. I believe that when they eventually act, the dollar will move to new highs. The dollar has been strong without an interest rate increase in 2015; the interest rate hike will validate the move in the currency. Furthermore, the fundamentals that will cause the rate rise are reason enough for an even stronger dollar.
Parity and more…
The table is set, the data supports a rate hike and the current positive interest rate differentials for the dollar will increase the case of a continuation of the long-term trend that began in May 2014. I believe that the dollar will work its way to parity against the euro and will become even stronger than that level in the months ahead. The U.S. economy continues to be on a steady course, and that is not the case around the world. The stronger dollar will cause commodity prices to continue to trade in bear market mode, which will keep the pressure on nations that depend on raw material revenues.
The dollar is an attractive currency today, by comparison. Owning a currency that has a higher yield and the promise of capital appreciation is very attractive to investors around the world, including central banks in terms of their treasured reserves. Parity against the euro is coming soon and could be a level that we look at in the rearview mirror in 2016 as the dollar continues its ascent. Long the dollar and short other currencies could be one of the best ways to protect assets in volatile markets across all asset classes.
As a bonus, I have prepared a video on my website Commodix that provides a more in-depth and detailed analysis to illustrate the real value implications and opportunities provided by the current state of the global economy and prospects for the future.
18 Comments on "Protect Assets With The Dollar"
Rodster on Mon, 16th Nov 2015 9:21 am
In this current globalized, highly interconnected financial and monetary system, the USD will always be King no matter how many want to see it toppled.
It’s like trying to operate on a patient who has terminal cancer and the failing organ that needs to be removed will kill the patient.
If the USD goes so will the global economy and will descend into a blackhole and total chaos. There will be NO Yuan gold backed world reserve currency, never. It’s too late in the game for that. If the Chinese had figured out what has transpired over the last 6-7 decades then maybe they could have made a push but that ship has sailed.
makati1 on Mon, 16th Nov 2015 9:42 am
Rodster… what happened to the UK currency? That was the world currency for almost 200 years. It lost it’s power in a few years, around WW2. The USD is not immortal. It is already dying under a Mount Everest of debt. The only question is if it will take years or weeks to crash and burn. After all, a 100# block of ice takes longer to melt than an ice cube, but they both end up as water.
If you hadn’t noticed, the world economy is already going down. It has been shrinking steadily this year and there will be no ‘turn around’.
Interesting that gold is now being bought and stored by most of the world’s central banks and those who have a lot of wealth to conserve. The demand for real gold (not paper promises) exceeds the amount mined every year. The difference is coming out of Western reserves and flowing East by the hundreds of tons.
Russia is supposed to be “suffering” under US sanctions, but they are still buying gold by the ton. And no one knows how much gold China has but it is multiples of their declared numbers. Some sources claim they could have 30,000+ tons. I have not seen anyone disprove that claim. And China and Russia are the worlds largest gold producer from mining, but it doesn’t leave their countries. Interesting, no?
“Seeking alpha is NOT a good source of advice.
Rodster on Mon, 16th Nov 2015 10:05 am
“Rodster… what happened to the UK currency? That was the world currency for almost 200 years. It lost it’s power in a few years, around WW2. The USD is not immortal.”
Every reserve currency starts out being backed by metal gold or silver. And every reserve currency turns to Fiat currency because of growing debt. No reserve currency is immune.
The point you are missing is that we are FAR TOO LATE in the game. The globalized interconnected financial, economic, banking and monetary systems are “THE CANCER PATIENT”.
If the USD goes which is the glue that holds everything together then the same globalized and interconnected system “SHUTS DOWN”. It all collaspes and descends us all into a Blackhole and total chaos no one will get out of.
You think the USD can be replaced by the Yuan? Guess again. If that were the case then why wasn’t an insignificant country such as Greece allowed to default?
Greece held the world hostage as everyone awaited to see if they defaulted or not and the financial markets felt the brunt. Greece will still default.
Now imagine the USD is Greece x 2000. That’s what the world is facing. Sure go ahead and take the dollar out and everything shuts down.
Now, do you want to be the first to pull the plug?
BobInget on Mon, 16th Nov 2015 10:42 am
What on Earth are ‘Bitcoins’ ? (backed with)
Boat on Mon, 16th Nov 2015 10:43 am
mak,
If you hadn’t noticed, the world economy is already going down. It has been shrinking steadily this year and there will be no ‘turn around’.
https://www.imf.org/external/pubs/ft/weo/2015/02/pdf/text.pdf
Why do you keep saying that when the global institutions say different. For at least 2 years you have been saying the global economy is crashing while it keeps growing. LOL At some point shouldn’t you wait for the crash?
Boat on Mon, 16th Nov 2015 10:57 am
Bob,
http://historyofbitcoin.org/
Davy on Mon, 16th Nov 2015 11:01 am
Rodster, you and I have consistently been on the same page with the world reserve currency issues. It is too late to change the system except around the edges. There are too few options even if the world had the will. We are sinking into a global depression at a minimum. The dollar will follow this process down.
Gold is a non starter with the status quo global system. Gold does not allow financial manipulation. Gold is best used as insurance in our hyper financialized system and little more. When the system crashes gold will likely have value but gold will have little practical use as an alternative to fiat currency. There is not enough and there is the practical aspects of exchange.
China is especially addicted to financial manipulation and unable to use its gold as an alternative reserve currency. All we have to do is look back a year and see all the hype that was going around when the Brics led by Putin were attempting a decouple from the West. That went nowhere. I enjoy so much rubbing that hype in Makster’s face. Makster is not interested in the details of the process. Master is interested only in winners and losers. This will be a lose lose proposition. Poverty is not winning and we are all sinking further into poverty.
JuanP on Mon, 16th Nov 2015 11:13 am
Boat, If you believe the “global institutions”, you are a deluded retard!
Boat on Mon, 16th Nov 2015 11:33 am
JaunP,
One trend noticed during my now 2 year experience of Peak Oil is the emotion outburst of doomers. Maybe that’s why I don’t get along so well with the pack. I don’t get to excited and don’t live in fear.
Of course I believe the global institutions. They have a very good track record. They post their revisions and why their projections were off. They are a very good indicators of what is happening around the world. I just wish I had more time for all the data to learn more detail.
Just ignoring data is just burying your head in the ground and relying on others to feed you ideology and opinion. This is how I know the world is not collapsing. lol. That and all the cars I see on the way to work.
peakyeast on Mon, 16th Nov 2015 11:35 am
Bitcoins are the most insane currency so far.
Imagine burning up vast resources having hordes of advanced computers doing useless algoritms that has NO real worth at all. “Mining” bitcoins is a PURE drain on everything.
Its so frigging insane that I wish to puke.
They are backed by the value of useless solutions to algoritms, the extreme waster of resources and a horde of mostly criminal fools.
Rodster on Mon, 16th Nov 2015 11:40 am
A gold backed reserve currency would and will never work with this current money system. That’s why I bring it up so much.
Our current money system is DESIGNED to exponentially create debt aka fractional reserve banking. It’s why you get to pay back the Banks 3x the loan value of your home for the life of the loan.
Richard Nixon took the US off the gold standard because of it’s MASSIVE debt levels (Great Society and Vietnam War) and the French were coming for their gold so he repaid them in USD.
A gold backed money system would not allow for our current debt driven system to work. They CLASH and COLLIDE and all this talk about a Chinese gold backed IMF-SDR is just that, talk because in order for it to work the money system needs to change and TPTB are giving up their power. That’s why they are referred to as TPTB.
I’ve been saying, China is the Poster Child for Crooks. Go ahead and trust the Chinese after all the tricks, schemes and shenanigans they try. If the $30-35 Trillion in QE doesn’t get your attention, then how about the bridges and roads to nowhere, ghost malls, cities, factories, a MASSIVE shadow banking system that dwarfs the US.
You want those CLOWNS running the show? Fuck that, they are worse than the current criminals running the world.
peakyeast on Mon, 16th Nov 2015 1:05 pm
@Boat: Not many here ignore the actual data – and certainly not the ones that you normally get into heated arguments with.
However, they are dead tired of the continuation of ridiculous projections by official institutes.
– They are also dead tired of people that think technology will turn finite into infinite in the blink of an eye – which is what is required at this point in time.
– They are also tired of people that think that solving ONE problem (with the possible exception of turning 6 billion into biomass in another blink of an eye without using vast resources and ruining what is left of our impoverished natural world) will solve what is a horde of problems.
If you had paid attention you would have noticed that by now.
Boat on Mon, 16th Nov 2015 1:23 pm
yeast,
If you knew anything about my posts I agree with most of what you said. Everything except timing. I have to see the calamity of climate change and the devastation that go up and beyond countries to deal with and then maybe make a say the time is within x years. Nothing is near that bad now. As far as tech goes who knows, the climate change problem may take decades. Until then, one decade or 10 we keep living.
GregT on Mon, 16th Nov 2015 4:38 pm
@boat,
“Why do you keep saying that when the global institutions say different.”
From your own link above asshole.
“Six years after the world economy emerged been slow. Low aggregate demand is one factor that
from its broadest and deepest postwar recession, a return to robust and synchronized global expansion remains elusive. The revised
forecasts in this latest World Economic Outlook report underscore the challenges all countries face. Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth rates marginally, but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago.”
https://www.imf.org/external/pubs/ft/weo/2015/02/pdf/text.pdf
Fuck-off you pathetic, lying, piece of shit. Enough of your ignorant childish BS.
GregT on Mon, 16th Nov 2015 5:26 pm
“Six years after the world economy emerged from it’s broadest and deepest post war recession, a return to robust and synchronized global expansion remains elusive.
The revised forecasts in this latest World Economic Outlook report underscore the challenges all countries face. Despite considerable differences in country-specific outlooks,
the new forecasts mark down expected near-term growth rates marginally, but nearly across the board. Moreover, downside risks to the world economy appear more pronounced
than they did just a few months ago.”
Boat on Mon, 16th Nov 2015 5:41 pm
GregT.
Once again you have trouble with comprehension.
from your post and my link
Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth rates marginally, but nearly across the board.
Notice the work growth? Not contraction. Growth is not smaller, it is bigger. Has winter set in and slowed thinking? Why is it you can’t grasp the idea of growth.
You know snow being up north, lets try this. If it is snowing and it lets up but still snowing means there is still accumulation. Not a melt down, not a stoppage but a slowing of growth. Get it?
GregT on Mon, 16th Nov 2015 6:45 pm
Mak: “If you hadn’t noticed, the world economy is already going down. It has been shrinking steadily this year and there will be no ‘turn around’.”
Boat: “Why do you keep saying that when the global institutions say different.”
IMF (global institution): “Six years after the world economy emerged from it’s broadest and deepest post war recession, a return to robust and synchronized global expansion remains elusive.”
“Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago.”
Boat: “Notice the work growth? Not contraction. Growth is not smaller, it is bigger.”
Complete fucking moron.
makati1 on Mon, 16th Nov 2015 7:51 pm
For your consideration…
“I’m talking about an entirely rigged political-financial system.”
http://www.zerohedge.com/news/2015-11-16/nomi-prins-crony-capitalism-corruption-entirely-rigged-political-financial-system
The US is Number One! LMAO