You can't turn on the news channels without hearing about the "strong dollar." And sure, the greenback was recently up more than 20% from its low last May. But you know what? The trading action in the U.S. dollar has been looking awfully "toppy" lately.
If the dollar is topping, it's a huge reversal of the recent trend.
For the last couple of years, investors the world over have been buying the dollar hand over fist. As a result, the dollar's value has been soaring against every major world currency.
The chart below shows the
PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP) - an ETF that tracks the U.S. dollar closely. You can see it's in a big uptrend. Heck, a runaway uptrend.
I circled where the U.S. Dollar Index Bullish Fund - i.e., the U.S. dollar - gapped higher on January 23. Two days later, it gapped down. This price level hasn't been touched since. That is called an "island reversal." It is indicative of a short-term top in the U.S. dollar.
Is the Dollar Running Out of Gas? The dollar enjoyed a big rally for many reasons. But here are two important forces:
1. Positive Interest Rates. The Fed's benchmark interest rate is just 0.25%, but would you believe that's actually a lot HIGHER than some other countries? And our central bank is hinting it will RAISE rates. Overseas, they're cutting rates.
Heck, 12 leading central banks have cut interest rates 15 times since the start of the year. Recent "slashers" include Denmark (four times in three weeks), Canada, Egypt, India, Romania, Russia, Turkey, Germany, Switzerland and Australia.
This means that many countries have negative yields. In other words, their central banks charge money to hold bank deposits.
- France and Belgium offer negative yields on maturities up to four years out.
- Netherlands, Austria, Sweden and Finland have negative yields on bonds up to five years out.
- Germany and Denmark offer negative yields on maturities up to six years out.
- And Switzerland - 13 years. THIRTEEN FREAKING YEARS!
So why do people buy negative-yielding bonds? Probably because they'd rather lose a little bit of money owning short-term bonds than risk losing a lot of money in the local stock markets.
That's what fear looks like.
2. Comparatively Stronger Economy.
U.S. economic growth may be nothing to brag about, but it's stronger than the economic standstill in Europe.
You can see why the U.S. dollar and deposits in U.S. banks got so popular.
But there can be too much of a good thing. With our currency going sky-high, our exports are getting more expensive. Goods made in America become more expensive for foreigners as their currencies weaken.
Result: The U.S. trade deficit jumped in December by 17.1% to $46.6 billion. That's the highest level since 2012.
And since U.S. companies' goods are expensive overseas, business slows down. That's one reason (but not the only reason) why the U.S. economy went from growing 5% in the third quarter to 2.6% in the fourth quarter. That's still stronger growth than Europe - for now.
Lower Oil Prices Grease the Dollar's Slide But now, oil prices have fallen so far and so fast that drillers across America are closing down shop, at least temporarily. The oil boom has turned bust.
This makes foreign investors think that A) our economy is going to slow down even more and B) the Fed won't be so quick to raise interest rates.
Meanwhile, things aren't so bad in Europe. And cheap currencies are boosting European and Asian exports, kicking economies on both sides of the pond into higher gear.
So now all that money starts to flow the other way.
Mind you, the dollar could start rallying again. But it's also true the U.S. dollar has its own long-term problems, including federal debt, deadlock in Washington and an economic recovery that can't seem to get out of second gear.
So keep your eye on the dollar. There should be plenty of profit opportunities in both the long and short term.
For traders who are interested in betting on a dollar decline, PowerShares also offers a
PowerShares DB US Dollar Index Bearish ETF (NYSE: UDN). Not surprisingly, this ETF has been one of the worst-performing funds of the last several months. But if the dollar does indeed begin to head south, this fund will head north.
I am not formally recommending this fund because I'm not a currency trader. But I expect a falling dollar to provide a wealth of investment opportunities in the precious metals sector. And that's where I'm focusing my attention.
2015 should be an excellent year for the precious metals!
Stay tuned...
All the best,
Sean Brodrick
for Free Market Café
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