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Thursday, April 24, 2014

The Dollar: extremely vulnerable to attack:



The US Dollar On the Ropes:

As bad as gold looks right now, it is at least still slightly above its (recently rising) 200 day moving average and the 50 and 200 day averages have just had a theoretically bullish crossover (unfortunately the 'golden cross' doesn't exactly have very convincing statistics as a bullish indicator). 

Still, none of this applies to the dollar index, which is all the more remarkable - five years into a supposed recovery - as numerous emerging market and commodity currencies have been bushwhacked over the past year or so, along with the yen. 

The dollar is stuck below both its 50 and 200 day moving averages, both of which are declining to boot. The reason for this dismal performance of this index is that the euro - despite all the problems of the euro zone - has been the by far strongest major currency, and the euro represents the biggest component in the dollar index.  

Let's remember that a year ago most analysts were predicting Euro Dollar parity to be the result of a resurgent US recovery and a Euro zone mired in recession.  Now, we still have the myth of the resurgent US recovery but looks at the backbone of the US economy:

USDThe US dollar index: the more often the shelf of support at the 79-79.50 level gets tested, the more likely it becomes that it will eventually break – click to enlarge.

In other words, if gold looks bad, the dollar looks even worse. Keep in mind that the Merrill Lynch fund manager survey found a record 83% of fund managers to be bullish on the dollar last July. This is historically a very reliable long term bearish signal. Conversely, a large bearish consensus (above  70%) can bring about rallies lasting a decade – as has happened with the yen for example. 

Let us not forget, even though the pace of money printing is slowing down now, the dollar money supply has grown by multiples of the euro and yen money supply since 2008. This relative pace of monetary inflation is by far the most important long term factor in relative currency valuation.

What happens to this monetary inflation/US dollar index once the Fed has to reverse course yet again to increase "asset purchases" as the BRICS continue to decrease US debt purchases?

Nobody knows, as we're in uncharted territory here.  But it might be good to own a few hard assets.

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