If the US dollar keeps rising from here, it’s going to hurt
Stock markets have taken quite a tumble this past week or so, and there has been a great
deal of noise about the end of the tech bubble.
Even with some 70%-plus corrections, many tech companies’ valuations remain extraordinarily
high.
What seems to have gone rather less reported is the extraordinary battering that metals
have taken too.
Whether base or precious, ferrous or platinum group, Russia-centric or dispersed, they have
been walloped.
The reason?
Their nemesis has risen…
We have been fretting about the US dollar for some time now.
A year ago in June, I did a vlog , “everything hinges on the direction of the dollar” and
then in November another to “beware - the most important price in the world is rising”.
I was worried, first, it would rise and then that it was rising.
Well, talk about risen.
The US dollar has been, of late, doing its best impersonation of bitcoin on one of its
bull runs.
It’s gone parabolic.
And right now, it’s at a particularly critical juncture.
The problem with the dollar is that, when it rises, everything else tends to go down
the swanny – generally speaking, of course.
It’s a bit of a chicken and egg job.
I’m never quite sure if the dollar is rising because everything else is tanking, or if
everything else is tanking because the dollar is rising.
In any case, we speculators prefer an environment in which asset prices rise and the dollar
falls.
We may give it the big one about the Federal Reserve’s money printing, but we still want
them to do it – if it means the well being of our portfolios is preserved.
Central bankers and politicians are not the only hypocrites!
But back in June I identified two key levels for the US dollar: 88-9 and 103.
This is the US dollar index we are talking about here.
That’s the US dollar measured against the currencies of its major trading partners – the
euro and the Japanese yen mostly, with a bit of pound sterling, Swiss franc, Canadian dollar,
and Swedish krona thrown in.
The only currency that has been outperforming the dollar of late has been the Russian rouble.
Go figure.
But note that one is the petrocurrency and the other is gas money.
Fossil fuels pay.
Indonesia should start demanding rupiahs for its coal (it’s the world’s largest exporter).
In any case, after its bonanza of the last 12 months, the dollar index now stands at
103.
With the exception of the dotcom bust era 2000-2002, this would be as high as it has
been since 1985, when the G5 nations had to get together and agree the Plaza Accord to
devalue it.
Yet even with its relative might, US inflation still stands at 8.5%.
That’s fiat currency for you.
I cannot stress enough what an important technical level 103 is.
It touched that level in late 2016, at the end of the Obama presidency, and again in
2020 during the Covid panic.
There’s a huge line of resistance there
If the dollar goes above 103 and stays there, what is currently an eye-watering situation
is going to become eye-bleeding.
If it makes a high here, or does a false move and a fast one in the other direction, then
the long metals, anti-US dollar, inflation trade is back on.
In fact, it’s pretty extraordinary how well metals have done this past year, given US
dollar strength.
That’s shortages and years of under-investment for you.
Wait and see what happens to them if the dollar starts falling!
In any case, let’s take a look at the long-term chart of the US Index to give you an idea
of where we are in the grand scheme of things.
There you can that run in the early 80s that ended with the plaz a accord … the big run
in the late 90s, the enar market of the 00s when commodities had a great run … the run
in 2014 … the end of the Obama presidency … the covid panic … and here we are upgainst
that resistance at 03 once again
There’s also that nice double bottom at 88 - 89
This recent rally looks miniscule on the 40-year chart, but let me tell you, it’s been quite
something.
As anyone who followed it through 1984, 2008 and 2014 will tell you, parabolic US dollar
moves can go on longer than you think.
But dollar moves also tend to end with spikes such as the one we have just seen.
And 103 is an obvious place for a spike to end.
The Fed has raised the federal funds rate by 50 basis points at its rate-setting meeting
this week, as expected, and the pressure has eased off.
But one wonders if general geopolitical jitters are a bigger factor here.
Bottom line - and without trying to second guess policy-makers - if we get a move above
103, 120 comes back into the frame.
That really would hurt.
Below 103, pressures ease.
But in this increasingly nuts world, the only real surprise seems to be no surprises.
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