On July 8 I wrote my last post concerning the U.S. Dollar. In the last line of that post I said “…I continue to believe the U.S. Dollar is highly vulnerable to a substantial decline.”
As “substantial decline” is somewhat open to interpretation, I would like to clarify what I meant.
Here is a chart of the U.S. Dollar on a monthly basis since 1983:
(click on chart to enlarge image)(chart courtesy of StockCharts.com)
As one can see, the current price of 81.64 is approaching the technically significant 80-level. This level has served as technical support on a number of occasions.
If that level is broken, there is not much precedence from a longer-term perspective. For many reasons I doubt that the 70.7 level reached in 2008 will serve as any type of significant technical support. Below the 70.7 level is obviously a “new frontier” with no obvious strong technical support. In essence, from a technical perspective the downside would appear rather open-ended.
From a fundamental perspective, a substantial dollar decline appears likely as well. As I wrote in my January 13 U.S. Dollar post, “Many people, especially those of the “hard money” and “Austrian” philosophies, have long held that many of the actions we (as a nation) have been taking to combat our current period of economic weakness would unduly pressure the dollar. These actions have included very low interest rates, truly outsized interventions (including “money printing”) and deficit spending.”
Additionally, I would like to address one comment I have repeatedly heard regarding the U.S. Dollar. Many people believe that the U.S. Dollar is (still) a “safe haven” as it has increased in price during The Financial Crisis of 2008-2009 as well as market turmoil during this year. As such, this purported continual “safe haven” status is supposed to support the idea that the U.S. Dollar is strong fundamentally.
While I see the reasoning behind this logic, I don’t believe that this logic or interpretation of recent upward Dollar movements is correct. Many complex factors impact the price movements of the U.S. Dollar, and I wouldn’t assume that just because it has recently increased during periods of market stress that it will continue to do so.
In summary, I continue to believe the U.S. Dollar is highly vulnerable to a substantial decline. This decline has the potential to be rather open-ended in nature, as supported by both technical and fundamental factors. Once the 70-level is broken, the U.S. Dollar decline would likely become very pernicious and levels of 50, as well as substantially below, should be considered possibilities.
Should such a U.S. Dollar decline occurs, this currency weakness alone would create an entire new set of severe economic problems and challenges.
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SPX at 1113.68 as this post is written