Friday, November 24, 2017

Don’t Be Fooled, The U.S. Dollar Index Will Be A Lot Stronger A Year From Now

As many traders and investors know, the U.S. Dollar Index (DX) broke out in September 2014. At that time, the U.S. Dollar Index was trading around the $83.00 level. Today, the U.S. Dollar Index is trading around $96.90 per contract. Just so that new readers understand the U.S. Dollar Index is a measure of the value of the United States dollar relative to a basket of six foreign currencies. These currencies include the Euro, Japanese Yen, British Pound Sterling, Canadian Dollar, Swedish Krona, and the Swiss Franc. The Euro is the most heavily weighted currency again the U.S. Dollar in the index at 57.6%. That is why the U.S. Dollar Index chart and the EUR/USD (Euro vs U.S. Dollar) chart look inverse to each other.

Many people in the investing world worry that the strong U.S. Dollar Index will hurt global exports. Well, the truth is that they will hurt global exports for the United States. However, the strong U.S. Dollar index will help to keep commodity prices low. Just look at a chart of crude oil and you will see that it has plunged as the U.S. Dollar Index has strengthened. You see, most of the oil in the world is priced in dollars and in order to buy a barrel of oil you must use U.S. Dollars. So it is safe to say that the strong U.S. Dollar is the primary reason for the decline in crude.

Many people think that the U.S. Dollar Index is rallying higher since 2014 because it is a good currency, but that is not the case. The U.S. Dollar Index is rallying because other central banks around the world such as the European Central Bank, Bank of Japan, and the Peoples Bank of China are printing money in one form or another. This is causing investors abroad to flee other currencies and buy U.S. Dollars. This action by foreign investors is unlikely to change anytime soon. Now let me be clear, the U.S. Dollar Index is not going to surge higher in a straight line, that is not how markets operate. The trend in the U.S. Dollar Index should remain up despite having some pullbacks along the way. The current large pattern on the U.S. Dollar Index chart signals a move to the $105 level and possibly higher. Now a Federal Reserve interest rate cut could cause the U.S. Dollar Index to retreat, but it is likely that other central banks around the world would also print more money to counter that move. So either way, it is going to be difficult to find a reason at this point in time for sharp dollar decline. The bottom line, the U.S. Dollar Index should be a lot higher a year from now.

Nick Santiago

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