U.S. dollar – what next?

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The U.S. dollar has been on a tear during September as a deteriorating global economic outlook and debt concerns spooked investors. However, the greenback sharply reversed course since the beginning of the month. Where to from here? Chartist Arthur Hill of StockCharts.com provides a short review below.

The U.S. Dollar Index ($USD) was hit hard this week with a 2.2% decline. Weakness in the dollar buoyed oil and stocks, which have been negatively correlated with the greenback. Dollar weakness and euro strength is also associated with the risk-on trade. Despite this week’s decline, the bigger trend is still up and support is close at hand. The first chart shows weekly prices with a double bottom breakout when in September $USD broke resistance with a strong surge that was confirmed by RSI, which broke to its highest level in a year.

The second chart shows more details with a daily candlestick chart. There are three reasons to expect support soon. First, broken resistance in the 76 area turns into support. A “throwback” to broken resistance is not uncommon after a breakout. Second, a move to the 76 area would retrace 61.80% of the prior advance. Third, RSI moved into the 40-50 zone. This area acts as support during and uptrend.

Source: Arthur Hill, StockCharts Blogs, October 14, 2011.

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Reserve currency: Greenback’s share declines, but still largest player

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It is not a surprise the dollar continues to be the preferred official foreign exchange reserve currency, but the share shows a gradual decline in the past ten years. According to Asha Bangalore, vice president and economist of The Northern Trust  Company, the IMF’s Currency Composition of Official Foreign Exchange Reserves for the first and second quarter of 2011 places the greenback’s share at 60.6% of official foreign exchange reserves, down from a high of 71.5% in 2001.

“The euro’s role has grown from a share of 17.9% in 1999 (when the euro was introduced) to 26.5% in the first two quarters of 2011 (see Chart). It is largely a tussle between the dollar and the euro, for now. It is noteworthy that the share of ‘other currencies’ has risen threefold to 4.8% in the first-half of 20o11 vs. 1.6% in 1999. The IMF notes that details of this category are unknown,” said Bangalore.

Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, September 30, 2011.

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Is the U.S. dollar losing its safe-haven status?

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“Since the bursting of the tech bubble in early 2000, the dollar has been inversely correlated with risky assets,” says a research note from BCA Research. “However, the recent weakness in the dollar is at odds with the historical relationship.”

Notwithstanding the sharp declines on global stock markets and surge in volatility, the dollar has not strengthened and the trade-weighted dollar index remains near multi-year lows.

According to BCA Research there are three key reasons why the dollar strengthens during times of financial stress:

(1)   global capital flocks to the safety of U.S. Treasuries,

(2)   U.S. investors stop sending their savings abroad (and even repatriate capital), and

(3)   the U.S. trade deficit narrows during recessions.

“This time around, however, the safe-haven factors have not turned in favor of the dollar thus far, even though it is premature to make definitive conclusions due to data lags. U.S. macro policies are the obvious reasons for the dollar’s diminishing role as a refuge: fiscal policy is a mess and the Fed is committed to devaluing the dollar.

“While economic policies outside of the U.S. are hardly picture perfect, foreign exchange is a relative game. Policies only have to be ‘less worse’ than the U.S. to win. Overall, the risks to the dollar are becoming increasingly asymmetrical.

The report concludes that reflationary U.S. policies will weaken the dollar with diminishing support coming during periods of “risk off” and recommends shorting the greenback.

Source: BCA Research – Daily Insights, August 23, 2011.

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US dollar – Fed’s “dirty little secret”

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Since Bernanke took office on Feb 1, 2006, the dollar’s purchasing power has fallen 11%, and its down 21% in the past decade and 82% since the U.S. got off the gold standard in 1971, according to Miller Tabak (via Yahoo Finance – The Daily Ticker).

“Currency depreciation is always a central bankers dirty little secret,” says Vincent Reinhart, a former director of the Fed’s Division of Monetary Affairs, in an interview with Aaron Task of Yahoo Finance – The Daily Ticker. “They don’t mind some depreciation at time …The trick is to generate some depreciation but not a lot.”

Reinhart said: “A design principle of Federal Reserve policy is to get inflation up – to create more dollars so inflation doesn’t fall anymore; that’s associated with currency depreciation. Nothing the Fed chairman or Secretary of Treasury says is going to change that. [But] they’ve got to say ‘a strong dollar is in the national interest’ because they don’t want to be seen as promoting a weak dollar.”

Source: Yahoo Finance – The Daily Ticker, April 28, 2011.

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Gartman: Shorting US dollar would be “very, very bad decision”

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Dennis Gartman, trader and author of “The Gartman Letter”, takes a look at what’s behind the dollar’s decline.

He said: “There’s no question, everybody, everybody is bearish on the dollar. To take a net short position in the US dollar right now, I think would be illogical. I think it would be a very, very bad decision. I have no net dollar positions on. I’m short yen against a lot of things. I’m long gold against a lot of things. But would I be net short of the dollar at this point? No, the boat is extremely crowded.”

Source: CNBC, April 20, 2011.

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El-Erian: “Dollar could lose its reserve currency status”

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Mohamed El-Erian, CEO and co-CIO of PIMCO, joins Tom Keene on Bloomberg to discuss developments in the Maghreb.

Regarding observations over the past several weeks that the U.S. dollar is no longer the “flight to safety” currency, El-Erian has a very dour outlook on the weakening greenback. He said: “It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S., worrying about the level of debt and what they’re hearing about states and municipalities. I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past.”

Source: YouTube, February 22, 2011.

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