US Dollar Index -- Will 80 Hold?

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US Dollar Index -- Will 80 Hold?

Since early June, the US dollar index has fallen from above 88 to barely over 80. Chart:

http://futuresource.quote.com/charts/charts.jsp?s=DX%20A0

As one might expect, commodity prices in US dollars are firm. With employment remaining weak, Bill Gross of Pimco says that the Fed won't raise rates for two or three years. Since interest yield is one of the reasons for buying a currency, the US dollar does not look attractive from this point of view.

When the policy interest rate is stuck at zero, unable to decline further, currency depreciation becomes an alternative form of easing. Not only does it boost exports and reduce imports, but also by raising prices (e.g., by boosting the CPI), it makes the real (inflation-adjusted) interest rate lower. This is the key -- when the nominal interest rate is stuck at zero, you can still lower the real rate by making prices go up.

Is the market foreshadowing a 'QE II' campaign by the Fed? Or is the Treasury deliberately letting the dollar slide? (Gone are the 'strong dollar policy' affirmations of yesteryear.) Maybe it doesn't matter. If the dollar can't hold round-number support at 80 (roughly the halfway point of its 71 to 89 range over the past two years), then it may plumb the bottom of the range again. 

In depression-like conditions, she who devalues first gets the most benefit. Let it bleed ... 

 

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Re: US Dollar Index -- Will 80 Hold?

Since this drop in the dollar was preceded by a 98 percent bullish dollar sentiment reading (and conversely a 2 percent Euro bullish sentiment reading) just about a month and a half ago, I would expect support at the 61% retracement, rather than the 50% retracement. Thus, I doubt 80 will hold in this bipolar market, though an observant trader should probably be "commodity-price averaging" into the dollar around 80, lol.

We really need more dollar panic at this point to feed the whipsaw.

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Re: US Dollar Index -- Will 80 Hold?
JAG wrote:

Since this drop in the dollar was preceded by a 98 percent bullish dollar sentiment reading (and conversely a 2 percent Euro bullish sentiment reading) just about a month and a half ago, I would expect support at the 61% retracement, rather than the 50% retracement. Thus, I doubt 80 will hold in this bipolar market, though an observant trader should probably be "commodity-price averaging" into the dollar around 80, lol.

We really need more dollar panic at this point to feed the whipsaw.

Thanks for your updates on sentiment values. I used to subscribe to a service called Market Vane to obtain sentiment figures. Is that the one you're using? 

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Re: US Dollar Index -- Will 80 Hold?

MH,

I use Jason Goepfert at www.sentimentrader.com for my sentiment analysis when I'm trading (I'm not currently trading). His service provides a great deal of market information and is very objective. I think a trader of your considerable experience would find value in it. Here is a short video overview of his site if your interested. If I remember correctly, his service costs about $20/month.

I'm not sure those figures cited in my above post came from his service, however. I remember posting those sentiment figures (and their source) during the "Euro panic" a few months ago in the subscriber section of CM.com. Unfortunately I no longer have access to that post because I let my subscription lapse.

All the best...Jeff

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Re: US Dollar Index -- Will 80 Hold?

Thanks for another great post machinehead.  When inflating the economy didn't work, the newly elected FDR devalued the dollar instead to stop the deflationary spiral in 1933.  It may well be the next step or already in progress.  Unless of course, the banks start making loans again (let's inflate another bubble).

macninehead wrote:

In depression-like conditions, she who devalues first gets the most benefit. Let it bleed ... 

That's the rotten part, all savings and investments valued in dollars will take a big hit, but as usual, the productive class pays all losses while the banks take any gains.

Our central bank is privately owned by international bank cartel members which means their first responsibility is to the cartel as opposed to national interests.  We have a "modern" privately owned central bank while we should have a truly national bank.

Henry C K Liu explained the difference:

"The mandate of a national bank is to finance the sustainable development of the national economy.  On the other hand, the mandate of a modern-day central bank is to safeguard the value of a nation's currency in a globalized financial market of no or minimal exchange control, by adjusting the national economy to sustain that narrow objective, through economic recession and negative growth if necessary.

A national bank does not seek independence from the government.  The independence of central banks is a euphemism for a shift from institutional loyalty to national economic well-being toward institutional loyalty to the smooth functioning of a global financial architecture.  The international finance architecture at this moment in history is dominated by US dollar hegemony, which can be simply defined by the dollar's unjustified status as a global reserve currency.  The operation of the current international finance architecture requires the sacrifice of local economies in a financial food chain that feeds the issuer of US dollars. It is the monetary aspect of the predatory effects of globalization."

Note: "Modern-day central bank" = international bank cartel

Currency value has to be related to the size of the national debt.  Currency loses it value rapidly as government becomes unable to pay off it's debt.  It may be that the dollar drops at a slower rate than many other currencies, but drop it will.

Larry

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Re: US Dollar Index -- Will 80 Hold?

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Re: US Dollar Index -- Will 80 Hold?
machinehead wrote:

Since early June, the US dollar index has fallen from above 88 to barely over 80. Chart:

http://futuresource.quote.com/charts/charts.jsp?s=DX%20A0

As one might expect, commodity prices in US dollars are firm. With employment remaining weak, Bill Gross of Pimco says that the Fed won't raise rates for two or three years. Since interest yield is one of the reasons for buying a currency, the US dollar does not look attractive from this point of view.

When the policy interest rate is stuck at zero, unable to decline further, currency depreciation becomes an alternative form of easing. Not only does it boost exports and reduce imports, but also by raising prices (e.g., by boosting the CPI), it makes the real (inflation-adjusted) interest rate lower. This is the key -- when the nominal interest rate is stuck at zero, you can still lower the real rate by making prices go up.

Is the market foreshadowing a 'QE II' campaign by the Fed? Or is the Treasury deliberately letting the dollar slide? (Gone are the 'strong dollar policy' affirmations of yesteryear.) Maybe it doesn't matter. If the dollar can't hold round-number support at 80 (roughly the halfway point of its 71 to 89 range over the past two years), then it may plumb the bottom of the range again. 

In depression-like conditions, she who devalues first gets the most benefit. Let it bleed ... 

 

You would think that if IR was a strong determinant of a currency "value" then the Yen would be at 500 to the dollar by now - but apparently the world cannot get enough Yen yielding 0%.

And what of the barometer gold while the dollar as dropped for the last couple of months?

hasn't really gone anywhere since last Nov. - rattling around in  a 150 point range.

FDR has it easy. Devaluation was a simple gold price decree away.  Now with all currency anchored by nothing other than the full faith and credit of the issuing party,  we're stuck with discussing the merits of 2-ply versus 1-ply and whether or not the quilting makes any difference.

What's really revealing is the discussion quickly moved to "sentiment" and fibbin nachos.  Currencies, bonds, stocks have all lost their anchor of fundamentals.  Nothing is bought to "hold" for more than 4 or 5 nanoseconds and it is unknowable how the murky derivatives tower influences any trade in some reactionary manner. All of this is primarily managed by programmed trades Since the typical human brain couldn't handle the requisite number of variables involved in any trade these days.  Of course Wall Streets computers being inserted between the floor and the retail suckers allows additional opportunities of influence and front running.

If your TA, astro readings, etc happen to coincide with the "plan" for the day, kudos - you win.  If not you lose. The volatility once partially isolated in the equity markets has rattled its way into the bond and forex markets. The financial markets are still awash in "liquidity" even if the real world isn't anymore. Until that liquidity blows up or is drained off the markets are at the mercy of a relatively small number of puppet masters who are now primarily playing a high stakes game of poker with each other.

 

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Re: US Dollar Index -- Will 80 Hold?
yobob1 wrote:

What's really revealing is the discussion quickly moved to "sentiment" and fibbin nachos.  Currencies, bonds, stocks have all lost their anchor of fundamentals. 

My personal experience flies in the face of this "unknowable market" attitude that is so ubiquitous in the blogosphere. Market sentiment analysis continues to perform just as well in this market as it did a decade ago. Despite its inhuman speed, computerized trading is just an extension of the human psyche. It so easy to jump to the conclusion that one cannot understand the current market, but for me personally, fundamental or technical analysis was never a significant factor in my understanding of the market place. 

Understand people and you understand the market. Computers are just tools. The short-greed / long-fear, market-neutral, trade still works like a champ in this market, as long as you have good sentiment analysis for context. Short of that, just fade the financial blogosphere and you can't go wrong.

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Re: US Dollar Index -- Will 80 Hold?
yobob1 wrote:

You would think that if IR was a strong determinant of a currency "value" then the Yen would be at 500 to the dollar by now - but apparently the world cannot get enough Yen yielding 0%.

That's exactly the example I had in mind, in saying that interest rates are 'one factor' that influences currency values.

During the bizarre interregnum between Nixon closing the gold window in August 1971 and 'full floating' exchange rates beginning in 1973, many economists thought that exchange rates would be mathematically determined by relative interest rates and inflation rates. Feed them all into a computer, and voila -- here's a printout of your cross rates. Rational expectations would prevail, the eggheads supposed.

Post-1973 reality turned out to be very different from this romantic notion. Influenced by expectations, sentiment, greed, fear, manipulation, rumors -- currencies soared and plunged to wild gaps from their equilibrium values. Their casino-like volatility, which continues to this day, was a shock to all concerned. Having been involved in importing Japanese goods, I was so aggravated by the absurd volatility of the J-yen that it was a major factor in convincing me to exit the business. Planet Japan's stupid currency literally kept me awake at night. 

yobob1 wrote:

Now with all currency anchored by nothing other than the full faith and credit of the issuing party,  we're stuck with discussing the merits of 2-ply versus 1-ply and whether or not the quilting makes any difference.

LaughingLaughingLaughing

In line with Modern Portfolio Theory, I'd advocate a diversified portfolio. Charmin is not the only game in town.

Basement waterproofing is the key to investment survival. Money mouth

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Re: US Dollar Index -- Will 80 Hold?
JAG wrote:

Market sentiment analysis continues to perform just as well in this market as it did a decade ago ... for me personally, fundamental or technical analysis was never a significant factor in my understanding of the market place. 

Although I haven't succeeded in implementing it, my 'unified field theory' trading model would incorporate all three factors:

1. Fundamentals: establish where the equilibrium value 'should' be.

2. Sentiment: tells you whether the asset is systematically undervalued or overvalued by herd opinion.

3. Technicals: tells whether mean reversion is actually occurring, or whether the crowd is still getting 'more wrong.'

Although it's tough to do it consistently, I've made a few sentiment-based trades that caught turning points within a day or two of the exact high or low. After such having such experiences, it's impossible to dismiss sentiment as irrelevant.

Economists don't like sentiment because it's 'irrational' and hard to measure. So they just declare, 'that don't count,' and continue tapping their halting way forward (or backward, or sideways) with their trademark white canes. Occasionally, six of them encounter an elephant and ... well, you know the story.

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Re: US Dollar Index -- Will 80 Hold?
machinehead wrote:
JAG wrote:

Market sentiment analysis continues to perform just as well in this market as it did a decade ago ... for me personally, fundamental or technical analysis was never a significant factor in my understanding of the market place. 

Although I haven't succeeded in implementing it, my 'unified field theory' trading model would incorporate all three factors:

1. Fundamentals: establish where the equilibrium value 'should' be.

2. Sentiment: tells you whether the asset is systematically undervalued or overvalued by herd opinion.

3. Technicals: tells whether mean reversion is actually occurring, or whether the crowd is still getting 'more wrong.'

Although it's tough to do it consistently, I've made a few sentiment-based trades that caught turning points within a day or two of the exact high or low. After such having such experiences, it's impossible to dismiss sentiment as irrelevant.

Economists don't like sentiment because it's 'irrational' and hard to measure. So they just declare, 'that don't count,' and continue tapping their halting way forward (or backward, or sideways) with their trademark white canes. Occasionally, six of them encounter an elephant and ... well, you know the story.

Reaction to above post:

Mwah ha ha! And that is pure sentiment based on the fundamental value of your wit, a rare commodity, facing increasing demand ! Laughing

Yobob--one ply or two play, quilted or non quilted?--Same. Thanks for the laugh. Hope to read more of you in future!

 

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Re: US Dollar Index -- Will 80 Hold?

Speaking of blind men, elephants and sentiment, here is a paper by St. Louis Fed president James Bullard. All about Japan, deflation risk, and sentiment, it's titled 'Seven Faces of the Peril' -- the peril being deflation.

http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf

Bullard worries whether the Fed's announced stance -- that the policy interest rate will remain low for 'an extended period' -- will actually heighten deflationary expectations. In two of his seven scenarios, he speculates whether a higher policy rate -- say 1.5 or 2.0% -- would actually be more effective in avoiding a deflationary liquidity trap. 

A higher real (and nominal) interest rate to avoid deflation? Sounds bizarre to me. It depends upon the Fed having a Greenspan-like cult following -- so that when the Fed says 'inflation is coming back,' everyone drinks the Kool-Aid, and prices magically start to rise. Some visuals posted on YouTube -- a turbaned Bernanke, charming a snake out of a wicker basket with his magic flute -- would be more convincing to me. But I digress.

Deflation is not what scares me. What does scare me is that behind Bullard's wry, sophisticated, jargon-studded exposition, it's rather clear that none of his PhD Econ peer group have the slightest concept of what went wrong in Japan, and what the US would have to do to avoid it. They are just firing wildly into the dark around their lonely campfire, hoping to hear a surprised scream from the menacing deflationary hyena lurking out there in the darkness. 

And since they are eggheads, there's a serious risk that they'll all start firing straight ahead while sitting in a circle. The Eighth Peril, as it were.

But they'll merely write it off as an 'exogenous event.' Laughing

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Will 80 Hold? Yes?

This could be a premature observation, but based on today's market action it looks like 80-ish is holding.

Looks like the USD "bull market" has some more room to run.... once again the market has wiped the floor with Bernanke, lol.

Is that med-evac choppers that I hear, or is it Bernanke's hyperinflation propaganda squadron dropping FRNs?

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