US Dollar Rally: The Beginning of the End

The dollar is setting up for a free fall.

Bullion.Directory precious metals analysis 27 January, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

The US dollar is up 20 percent and positive for six consecutive months, yet these moves are not all that uncommon in recent history. Unfortunately, they foreshadow disaster.

The dollar is strong for all the wrong reasons, albeit speculation, central plan.. I mean banking, and the prospect of disinflation, if not deflation.

A strong dollar is great for consumer if the economy is healthy, but not in its current anemic state. A soaring dollar on poor fundamentals is a canary in the coalmine.

Dating back to 1988, the dollar has seen four moves of 20 percent or higher. After each move created a top, it pulled back and retested the highs, then fell at least 16 percent.

Interestingly enough, the dollar climbed just above 24 percent in 1988-89, 1999-2001, and 2008-2009. In the last two moves, the dollar contracted and expended back to the highs prior to entering a rapid decent. The previous two rapid ascents and descents were paired with an utter collapse of equity prices.

This does not mean the greenback cannot go higher because I expect it will leading into the Q2 – when Fed Chair Janet Yellen trapped herself into another box by saying a hike in the Fed funds rate would happen after a “couple” of meetings.

Dips in the dollar are likely to be bought, and 96 on the dollar index could be challenged.

Here, I expected the dollar to overcome the 11-year resistance trend line by surpassing 93.75 given the strength of the carry trade. After easing to 94 today, the dollar could retest 93.75 before rallying.

The problem is a strong dollar is not great for the economy because the recovery is null.

Consumers do receive greater purchasing power, but that takes a back burner to the Federal Reserve’s excursion to inflation. A stronger dollar is deflationary, which will bring down asset prices. And that could be dangerous when they are all pushed up due to central banking.

I expect the Federal Reserve to step in to weaken the dollar if the market doesn’t beat them to the punch.

Furthermore, it is crimping corporate earnings. US equity markets tanked today on a really bad earnings season start. 18 S&P corporations have reported earnings and all were below expectations. If the S&P was “forward looking,” more declines could be on the way. Foreign exchange debasement is causing companies to cut earnings forecasts and lower forward guidance.

And if earnings are the Mother’s milk of equities, sorry Larry Kudlow, Mother is dry.

Multi-national Proctor & Gamble (PG) said during its earning report, “foreign exchange will reduce fiscal 2015 sales by five percent and net earnings by 12 percent, or at least $1.4 billion after tax.” 47 percent of the S&P’s earnings come from overseas business activity, and it becomes increasingly challenging when every major currency is debased except the dollar.

We are now seeing companies begin to shed jobs in order to restructure costs. Whether low oil prices or a stronger dollar, it’s “unambiguously” bad for the average American.

Oh, but one may point out that the CB consumer confidence blasted through expectations. Coming in at 102.9, the print beat expectations of 95.1. It was the highest it’s been since Februrary 2008.

Let’s see what followed, shall we?

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