STAFF NEWS & ANALYSIS
This Index is Screaming a U.S. Dollar Decline
By Grayson Schultze - April 28, 2016

The dollar has an opportunity to make history. After three straight years of gains, strategists are forecasting the US currency will be a world beater again in 2016, strengthening against seven of 10 developed world peers by the end of the year.  – Median estimate from Bloomberg Survey

Two data points may establish a trend. Three can confirm the trend – with a margin of error.

But what happens when six data points line up in the same direction?

It’s a full-blown, screaming signal.

While strategists at Bloomberg are optimistic about the dollar’s continued strength in the coming years, our analysis of six separate data points tells a very different story.

The six data point signal is the U.S. Dollar Index, an index that measures the performance of the dollar against a basket of six currencies – the Euro, Japanese yen, British pound, Swiss franc, Canadian dollar, and Swedish krona.

Post-U.S. financial crisis of 2008, King dollar had tremendous gains against these six currencies. The lowest gain was against the British pound at 19%, with the rise starting in 2014. Also with the rise dating from 2014, the U.S. dollar gained 24% against the Euro.

In 2011 the USD started its rise against the Canadian dollar, Swedish krona, and Swiss franc. The dollar would go on to post gains of 35%, 32%, and 30%, respectively.

Ever since the so-called U.S. economic “recovery” – no doubt orchestrated by the D.C. economic geniuses – King dollar has had its time in the sun. And many, both in and outside of the D.C. establishment – think the good times will continue.

But the point of this article is not to highlight the dollar’s rise in recent years. Instead, the point is to highlight the dollars’ even more recent fall against these half-dozen currencies.

The past six months have not been kind to the dollar’s value against the currency basket. To be clear, the dollar still remains strong and, in the meantime at least, it will continue to be king. However, chinks in the dollar’s armor have appeared.

The data proves it.

Going back in the data for five years, against five of the six currencies – the yen as the exception – the dollar peaked anywhere from November 2015 through February 2016. The dollar peaked against the yen a bit earlier, in June 2015.

In the past six months, the USD has declined against all six of these currencies. From a low in the range of a 5-7% pullback against the pound, Canadian dollar, Euro, and Swiss franc since the respective highs to a 10% and 12% decline against the yen and krona, respectively, the USD has a trend: down.

Conclusion:

The relative strength that the U.S. dollar has seen in recent years is fading.

And the further acceleration is likely in coming years, only adding fuel to the inevitable inflationary fire. Which means less and less purchasing power for those holding dollars.

Unfortunately, all fiat currencies are in a race to the bottom. But it’s not all gloom and doom. Fortunately, there are alternatives – currencies in other jurisdictions that will better hold your purchasing power.

Certainly, as will be evident in the coming years, U.S. dollars are no longer a place to store your entire life’s savings. Diversification into other currencies is paramount.

Posted in STAFF NEWS & ANALYSIS
  • Bruce C.

    The problem is I don’t see how the US dollar is going to flame out before most of the others do first. The dollar probably has the strongest love-hate relationships on the planet because even though everyone wants off the merry-go-round they’ll get crushed too if the dollar falls. That’s not a stable situation but the ironic “solution” is to invest in dollars to maintain its strength. At the same time, the US wants the dollar to weaken so that actually provides some stability too.

    Drilling down a little deeper, consider the Dollar Index itself: Every one of the currencies that compose it are even worse off. Because of the ME refugees Sweden – and by extension the Krona – is soon going to be removed from “the most wonderful socialist paradise” list. Between Canada’s real estate bubble and downswing in oil revenues you have to be looney to want to own loonies. The Swiss franc has lost its credibility (= strength). We shall see about the pound but if there is a BREXIT my guess is it would get pounded. The yen is only up because of short covering in the FOREX market because of one sided short positions (“everybody” knows the yen is going down.) Basically, for every reason the US dollar should weaken, it’s doubly true for the yen. That leaves the euro (and yuan) – yikes!

    I suppose it makes sense to buy other currencies with dollars to take advantage of the dollar’s relative strength at this time, but they’re all fiat/paper currencies. I’d buy PMs first.

  • 2bvictorius

    Anyone not a professional trader in currencies would be wise to stay away from such foolishness. There is no easier or faster way to lose everything than the currency scams.
    The nations of the world and banking institutions move trillions of government money so a movement in a down direction can wipe out the small fry in one second.

  • Christopher Snittle

    The dollar will collapse as soon as we run out of zeros.

  • XKeyscore

    Well it certainly is some indication since PM’s are on the up tick. They say gold is the anti-dollar and thus there is an inverse relationship between the two. But the dollar is holding well above it’s crucial point of 80 at 93.634 and is showing signs of a decline only for two months now not 6 as the article suggest. Then again how is the USDX a true and fairly distributed index? Seriously, when the dollar doesn’t have to make any progress at all to move up, the other six just have to move down for the dollar to go up. After all 1st quarter GDP is only at 0.5% mainly because of global economic slowdown. But as the article says all currencies are sucking and the Baltic Dry Index also proves this. I just cant wait for gold and silver to do a moonshot!

    I expect if there is no recovery, (a real one, not the fake one they are broadcasting), war will once again become the force multiplier to boost the economy and further mask things over. Mass chaos and the old problem, reaction, solution methodology may perhaps usher in Negative Interest Rate Policy as the end game and solution to repair the troubled economy.

  • jackw97224

    Thank you Grayson. You remind me of Zimbabwe and Germany circa 1922 and France 1790s and Rome et.al. All fiat currencies collapse, almost all descend to zero value. You might have read Ralph Foster’s book, Fiat Paper Money, a nearly exhaustive review of all the fiat currencies that have collapsed because of the crookedness of politicians/leaders,

  • rahrog

    All fiat units are akin to toilet paper. Used toilet paper. Flush and move on.

  • boatman10

    as the EU comes apart as the PIIGS default, and then japan blows up, the dollar will see 160……..but it gets its turn last, sees 40 as a new world reserve system is established by 2032, possibly with gold as a component if we can take the power back from the politicians.

  • Pilgrim

    The strength of the US dollar is based solely on deception. As long as there are enough people around the world who think it’s worth something, it will continue to be used as if it is worth something.

    The problem with the dollar deception is the people running the printing presses. If they were smart, they would be cautious not to print too many to give away the scam.

    Obviously “smart” and “scam” combine as well as oil & water.

  • picomanning

    The pressure on the dollar is as inexorable as America’s (and all other nation’s), growing debts. It has been and will continue to be easier for politicians of all nations to cowardly ignore the darkly encroaching horizon than to act heroically. And as long as the public is unaware of the disaster ahead, Central Banks will fumble along and use the excuse that they are operating under political pressure. Get ready, this will be worse than any politician or Keynesian economist (especially those working for the government – or Fed – or Big Bank) will let on.
    Even if they understood what’s happening.

  • Matthew Chen

    The Gold Price is a better ‘index’ to show how the US dollar is performing since 15 August 1971, when Pres Nixon closed the gold window and disallowed redemption of gold. It was a temporary de facto default, which became permanent.

    The price of gold was then only US$35 an oz. Today, it is US$1292 an oz and this shows that the US dollar has depreciated against Gold by 3691%, since 15 Aug 1971.

    There will be an even bigger US dollar depreciation to come if the FED keeping printing dollars out of thin air.

    • synthetic_society

      I believe that’s a 97.3% decline.

  • Dale Holmgren

    The most obvious indication that the dollar will go down is that the BofJ had every excuse in the world to vigorously weaken the yen against the dollar last Friday, and didn’t do so. It’s clear that the BoJ (and the ECB) have been told it is now the dollar’s turn to weaken to help the Chinese yuan.

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