Death of the Dollar

 In case its not clear, my title is said with tongue firmly planted in cheek

I wrote this post 10 days ago and while it is a bit stale, it is just as important now as it was then. For the past 2-3 years I have read so many stories about how “the dollar is dead” and how “the world’s reserve currency is history”. While that may be true at some point in time in our future, right now, as with all things in which sentiment has risen to an extreme, it is moving in exactly the opposite direction that everyone predicts.

While we were closely watching the Euro and Yen fall on hard times, the lowly and unloved dollar slyly staged a breakout of a multi-year downtrend.

While many investors don’t pay attention to the movement of currencies because they are typically not a part of most investment strategies, there are very strong inter-market relationships between investments and the dollar. For this reason, the ramification of ongoing dollar strength can play havoc with portfolios that are not positioned correctly. Some of the potential major implications of this upside breakout are:

  • US Dollar denominated yields could fall further
    • If bond yields fall, US bond prices will strengthen.
  • Foreign denominated bond prices should weaken
  • A strong dollar puts downward pressure on commodities – while not all commodities move in tandem, most commodity prices should move lower.
  • Foreign stock prices should weaken.

How far the dollar can climb is anyone’s guess but the first target that shows up on the charts is the 2013 high of 85.  Beyond that and depending upon what is driving it higher, a retest of the 2009 (88) peak or even 2007 (91.5) highs may not be out of the question.

In spite of the dollar doomsayers, the (2013) world’s largest economy (European Union) is teetering on recession, the US, while not robust, keeps chugging along. Whether this is the impetus for a continued stronger dollar no one knows for sure and regardless of your long-term feelings about the dollar, right now she is the prettiest girl at the dance.