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The U.S. Dollar Bear - Adam Hamilton
CivilBear - Fri, Apr 11, 2003 - 07:02 PM
Hamilton's outlook on the greenback? He's bearish.
An excerpt, followed by the link to the full article..
The US Dollar Bear
Since the mighty US dollar is the de facto global reserve currency, its trading behavior is exceedingly important for investors and speculators around the world to monitor.
In many ways the US dollar has become the central linchpin of the entire global economy, including both financial markets and international trade, so it is difficult if not impossible to overstate the importance of the dollar to the world financial system today.
While investors and speculators basing out of other countries are ever cognizant of the fluctuating tides of fortune driving the dollar’s value as a currency, we Americans all too often take the dollar for granted and totally ignore its trading behavior. Most Americans, having spent their whole lives in a dollar world, don’t even consider the potential impacts of dollar trading on the US markets and economy.
Yet, the dollar’s performance in the international currency markets has absolutely enormous implications for American and foreign investors and speculators alike. The dollar’s behavior has dramatic effects on the equity markets, bond markets, interest rates, commodities, and international trade in the United States.
The more that I ponder the dollar, the more that I realize how deeply it affects so many other critically important markets in the States and abroad. Every dollar-denominated financial market or asset on Earth today is both connected with and vulnerable to the fate of the US dollar in the international currency markets. As such, all investors and speculators need to stay abreast of dominant dollar trading trends.
While the US dollar spent all of the late 1990s, the bubble years in US equities, in a magnificent bull market, today the dollar languishes in a powerful primary bear market. As investors in US equities have been learning the hard way in the past few years, investment strategies that work smashingly well in a major bull market are suicidal in a bear market.
Why can I make the assertion that the US dollar is now in a primary bear market? Easy, the dollar’s recent technical behavior fits the classical definition of a bear market perfectly! If it walks like a bear, growls like a bear, and mauls like a bear, then it’s probably a…
A bear market is simply a persistent downtrend lasting longer than one year marked by a long series of lower interim highs and lower interim lows. Some folks also like to go a little farther, claiming that a 20%+ total loss over the same greater-than-one-year timeframe is also necessary for induction into the pantheon of formal bear markets.
While this 20% number seems a bit arbitrary in my opinion, there is no doubt that the one-year-or-more time component is crucial. Any financial-market trend lasting less than a year is probably merely an emotionally-driven speculators’ game. Until a dominant trend can flex its muscles unopposed for a year or more, it is dangerous to consider it something more than temporary. As an example, the powerful countertrend bear-market rallies in the NASDAQ typically flare up intensely for only 6-8 weeks or so, while the primary downtrend has run for 37 months straight!
The single most popular way to measure the dollar’s value in the world today is without a doubt the famous US Dollar Index. The US Dollar Index is a futures contract that trades on the New York Board of Trade. Futures and futures-options speculators around the globe relentlessly trade these US Dollar Index contracts to actively speculate on the US dollar.
The US Dollar Index is valuable not only because it is popular, but because it compares the US dollar to a basket of global currencies rather than just one. Today the index consists of a trade-weighted geometric average of six currencies. Currently the European euro dominates the index with 58% of the weight, the Japanese yen comes in second at 14%, the British pound 12%, and the Canadian dollar at 9%. The remainder is divided between the Swedish krona and the legendary Swiss franc.
These weightings change periodically, just as the components of major stock indices change over time, but the US Dollar Index remains a fantastic way to monitor the US dollar’s performance as a whole in the global markets. I suspect that the Chinese yuan will eventually be included, especially if the massive emerging economic power of China is combined with the world’s first major gold-backed currency in decades. A golden yuan could rapidly dominate Pacific and Asian trade and would have to be included in the US Dollar Index.
With the US Dollar Index being volunteered as our chosen measuring rod, the new primary bear market in the US dollar is quite apparent. All the graphs below show the US Dollar Index, and for the remainder of this essay I am going to use the terms “dollar” and “US Dollar Index” interchangeably.
Our first graph this week not only highlights the dollar’s bear, but shows a provocative comparison with the flagship US S&P 500 equity index. The behavior of the dollar in global currency markets intimately affects the performance of the S&P 500, one of many reasons why American investors and speculators need to pay very close attention to the dollar!
http://www.safehaven.com/ZEAL/041103.htm
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The U.S. Dollar Bear - Adam Hamilton
CivilBear - Fri, Apr 11, 2003 - 07:02 PM
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