DOLLAR INDEX TREND CHANGES

We have undergone an extended period where the Dollar Index ($DXY) has fallen, and then risen some but not as high as the previous high, then fallen some more and risen again but not as high as the previous high.   This downward sine curve started last December, 2016, when the dollar index was above 102.  We went through five declining peaks and valleys until the bottom set at 91.32 on September 8, 2017.

The following rise went to 93.79, slightly higher (not lower) than the previous peak of 93.73, indicating that the declining trend in the dollar might be over.  The following valley only declined to 93.05, higher than the previous low of 91.32.  The dollar index closed Friday at 94.80, higher again than the previous high of 93.79 on October 6.

Click on figure to enlarge)


How high the dollar may go in this rising trend is anyone's guess, but the high of last December was substantially higher than now.  But the previous period prior to December 2016 had a horizontal trend of peaks close to 100 and troughs close to 92 in 2015.

Incidentally, in 2014 the $DXY hit a trough of 79.90 and the dollar has never gotten close to that in 2017.

At any rate, the rising dollar will have an macro economic effect, dampening U.S. export profits that doesn't sound good for multi-national companies at a time when the global economy is increasing nicely that does sound good for multi-national companies.  Will the two things balance out?

Watch this space.

DOLLAR INDEX (25 YRS)

Ever wondered what the dollar looks like over a long period of time.  Bar Chart provides a chart of the Dollar Index ($DXY) over a 25 yr period.*  The Dollar Index is how the dollar trades against a basket of currencies.  The Euro constitutes about half the index because of all the countries that used to be involved but now are in the Euro.

You will note that the Dollar Index today is just about what it was in the early 1990s.  The steep strengthening of the Dollar Index was during the latter 1990s, the Clinton years, of a greatly expanding economy.   The recent steep strengthening is during the Obama recovery years from the Great Recession.  Note the weakening of the Dollar Index mainly occurred before the Great Recession.

(Clik on figure to enlarge)

* http://www.barchart.com/chart.php?sym=$DXY&t=BAR&size=M&v=0&g=1&p=MO&d=X&qb=1&style=technical&template=

DOLLAR INDEX RECENT HISTORY

The Dollar Index (DXY) was originated by the Federal Reserve and was originally designed before the Euro came into being, therefore it may come as no surprise that the Euro makes up more than 50% (57.6% actual) of the dollar index with Japan being number two at 13.6%.  The Pound Sterling (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%), and Swiss Franc (3.6%) follow.  The Dollar Index is a weighted geometric mean of these six currencies, our six most important trading countries (Note: China is not on the list.).*

Very recently the Dollar Index has risen sharply, i.e. the dollar has strengthened, making exports from the US more expensive and imports less expensive that will no doubt widen our trade deficit.   Below is a graph of the Dollar Index going back through 2006.  You can see that the Dollar Index is now at its third highest peak since the Great Recession;  however it has been much higher and topped 120 briefly in 2001 and didn't drop below 100 until April of 2003.**  It has remained below 100 ever since.  It dropped below 72 in April of 2008.***  It closed on November 19 at 87.11.

Figure from BarChart: http://www.barchart.com/quotes/stocks/$DXY


* http://en.wikipedia.org/wiki/U.S._Dollar_Index
** http://futures.tradingcharts.com/historical/US/2001/0/continuous.html
*** Actually there was a "flash crash very briefly in the dollar index in April of 2007.

THE BULL MARKET OF 2009

From about mid-March through the end of this year, the stock market indices have risen marketly. A common explantion of this increase in confidence in the investing community is that the week dollar is the cause. This may not be the case as the dollar was weaker in 2008 and the stock market indices declined.

From my post on Motley Fool - #313939 on the Investment Club Analysis/Macro Economic Trends and Risk.: About the stock rise being due to the falling dollar, from February 28th through August 5th in 2008, the dollar index spent only one day above 74.0 (June 13th at 74.06). All this period is lower than we have seen to date this year. I don't recall any boom in the stock market then. In fact the S&P500 fell from 1367 to 1285 during that period or 6%. Personally, I think the claim that our present stock market cyclical bull market is due to the weak dollar is pretty weak. I'm not sure what the bull market is due to, perhaps speculation that the stock market drop overshot in its decline? Optimism that the all the stimulation from super low interest rates and Federal stimulus is bullish long term?

Incidentally in an op-ed article on 3 December 2009, Robert Samuelson said, "Despite huge federal budget deficits, total borrowing in the economy dropped in the first half of the year; this hasn't happened in statistics dating to 1952." http://www.washingtonpost.com/wp-dyn/content/article/2009/12/02/AR2009120203400.html This is a measure of just how much borrowing has dropped in the non-govermental sector in 2009 to counteract Federal spending. In view of this, perhaps it is not surprising that inflation is tame.