November 21st, 2009

One Reason the US Dollar Index Might Increase

Have you heard the story about the man who bought a U.S. Treasury Bill for $1000 knowing before hand that he’d only get back $995 at the Bill’s maturity. “What kind of idiot would do something like that?”, you ask. It’s irrational, it doesn’t make sense. Give someone $1000 knowing you’re going to get back – not more money in the form of interest but less money. You’re paying someone to take your money. Again, it makes no sense.

I pondered how and under what circumstances something like this might make sense and then – I figured it out. No one living in the US would do something so irrational. But there are some who would. People who live in, do business in and aren’t dependent on the $US might do it. If I lived in the U.K., for example, I might convert my Pounds into $US in order to buy some Treasury Bills if I thought, or knew, that when I converted those Bills back into British Pounds they converted back into more Pounds than I original paid. As a matter of fact, if I lived almost any place in the world other than the U.S. (or China, for that matter) I could see making a profit by parking my money in $US’s if I had a fair degree of certainty that $US’s become more valuable to me in my currency down the road. What I gave up in interest (or paid in “negative interest”) I might recoup in exchange conversions.

That’s what I’m guessing might be happening. Foreign investors or sovereignties are looking at the distinct likelihood that the $US will soon increase in value, more than the increases over the past 4 days (the DXY, US Dollar Index, is up to 75.61 from 74.88, or 1%, since November 16).

Does this signal the end of the Dollar’s decline? Has a deal been made to prop up the $US. Does this have anything to do with negotiations to have the Chinese allowing the Yuan to edge up in value also?

One can speculate about all sorts of conspiracy theories that are way beyond our understanding or comprehension. What we do know and fear, however, that a rise in the $US, a rise in the US Dollar Index, will probably be detrimental to US stocks. Perhaps that’s what has lead to the market’s recent weakness.

Something like this was last suspected about a year ago (November, 2008) when the rise in the Dollar’s value of came to a surprising, abrupt and screeching halt. Perhaps its mirror image has begun to be re-enacted today. And what better time to pull something like this off than Thanksgiving week, a time when many have already begun taking time off for an early Holiday break.

By the way, while you’re contemplating, look at the tops that have been made in the graphs of most of your foreign exchange and foreign market ETFs. Conspiracy theories are so much fun …. unless you’re counting on a continued fall in the $US.

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  • Minnesotalee

    Since Mar09 the dollar has fallen almost in a straight line except for one small pullback early in this period. Even the $$$ can pullback (upward slightly) without affecting the chart pattern. I predict that before any accummulation takes place for a $$$ turnaround the low price objective will be $63. The downward momentum is way, way too strong to avert this. Yes there may be some pullbacks, but this pullback is only a second breadth to go down further. It is not a sign of a $$$ recovery. No chart pattern that I cover convinces me to the contrary. Again pullbacks are needed in the SP500 and $$$ to keep the momentum going forward. With our debt there is no evidence that the $$$ can move up except for any slight pullback you have witnessed. I do believe you need to stick with the technicals and not let any dips (SP500) or moves up ($$$ index) to sway you on a path contrary to the market's momentum. You will not see this happen here and I am only as optimistic as the charts are telling me. Statistically it can happen since nothing is guaranteed. These charts however have very high statistical patterns to make it almost that.

  • Joseph Meth

    I agree with some of what you say (uptick before further down) but $63? That's off my charts both in distance and time (if ever). In the near term, I see a move to 80 (up 5.8%) sometime in first half, 2010 before we have to decide which way from there. But we're merely pebbles on the shore when it comes to Forex and all we can do is hope to catch a nice wave to ride to shore.

  • Minnesotalee

    Appreciate Joe your thoughts. That's what makes a market, having two traders w/opposing views. My $63 call is not too far from March '08 low of below $71 w/o the debt this country is facing under Obama presently and in the future. So my price objective is based on a count from a given pattern. Statistically it could reach this mark. The math behind this is a bit better than tossing a coin, but I would be interested in your call for the dollar low. Even if the $ pulled back to $80 (which I feel is too excessive), you must have an indication from your chart patterns as to the next move down. The patterns are too negative for an abrupt change in the $ momentum. What's your view? I am still guessing near $63. Maybe I am off a few Euros.

  • splitter

    USD is done to the downside for now. monday, the 23rd, begins a great awakening with a spike
    it will get ugly fast with a close above 76.80
    the correction for the spx and dow wont be as great as the rut and ndx, but it will be fast.
    look at the 91day. where can it go?
    tighten your seat belts, your stops get ready for a lesson corrections in bear market rallies.

  • Joseph Meth

    I have no better idea about the $US low than you. We're all looking at the same data and charts so everyone can see the 08 low of 70. Will it go lower? No one can tell. Will it go higher than 80? Same story. This country is uncharted waters and with the world having run with the $US as the standard it's hard to know what happens should that change to some IMF World Currency Index.

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