Thursday, April 21, 2011

USD Long Term Perspective - April 21, 2011

As a fan of history, I like to give context to current events. Some notes on long term price moves of the dollar index (cash)
  • For ten years, 1987 - 1999, the dollar roughly traded in a range of 80 and 100 ($20 dollar range)
  • I see two Major trends between the period 1987 and 2011
    • Mid 1990's boom - Housing boom, low interest rates, positive technology shock, human capital development
    • Tech Bubble Burst, rising interest rates, 9/11
  • 2008 financial crisis/housing bubble burst cause the dollar index to reach historical lows on the USD cash index
  • Since the 2 major trends cited above it seems ranges have normalized
The 80.00 level is a significant long term psychological level. Both major trends occur above this support level. The support level is broken with the onset of the 2008 financial crisis. The major trends plus the 2008 financial crisis indicate major changes and events in regards to the context of the USD. The rise of the USD coincides with the rise of the US economy in the 1990's which reflected its dominance in the world. The subsequent fall of the USD coincides with the rise of the new strength (not  necessarily dominance) in other major pairs mainly the Euro (the largest component in the dollar index construction) vs. the dollar, which also is inline with the rise of importance of other economies (again not necessarily dominance). 

Of course the 2010 sovereign debt crisis put the Eurozone into question, but looking at the range of the USD movement indicate that perhaps the crisis is not as important as markets would have us believe given much larger USD trends and ranges in the boom and bust described above between 1995 and 2007. As shown in the chart above the period from 2007 onward shows a narrowing US price range. 

What is important is the underlying fundamental structural changes that have occurred over the history as marked by the broken 80.00 support level. Of course I emphasize the strength/importance of other economies does not mean the demise of the USD anytime soon. Significant hurdles to overcome, that can take decades to play out, are still in place; China's pegged currency, world economies' reliance on crude oil, soft agriculture products priced in dollars, and of course the US still being the number one economy in the world. 

Significance may wane, but overall dominance of the USD is still there along with the economic support. Like I wrote in my last POST, a new panacea is needed before we can see further fundamental shifts (I was referencing the energy industry, but the idea applies here as well). 

Some bulleted conclusions:
  • New ranges can be seen between 70 and 90 on the USD cash Index - similar to the $20 range seen between the 1987 to 1997 decade but at new lower level (reflecting strength of other economies)
  • As economies normalize out of the recent volatility periods the USD index has room to range to 70 which equates to 2007 level exchange rates such as 2.00 GBP/USD, 1.60 EUR/USD. 
  • The fundamental structure between Asian economies and Western economies is very apparent in the AUD/USD and NZD/USD as the pairs are reaching new historical highs in literally uncharted prices territory.

PS: todays USD drop caught me by big surprise as I was expecting a much bigger dollar strength correction. Prices can remain elevated for a few months before a real large correction will occur, go with the flow...

April 21, 2011 - 6 month daily

Analyze Capital LLC

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