As we move into an unusual mid-week Fourth of July celebration in the U.S. (i.e. no week-end holiday), I thought I would take the opportunity to comment on the U.S. dollar and its longer-term cycle as the dollar's value relative to other world currencies has an effect on and is affected by many financial markets.
The U.S. Dollar Index is approaching the end of a long-term 16-17 year cycle that began with a low of 71 in March 2008. Most likely this cycle peaked with the high of 104 on January 3, 2017 and is now taking a correction down to a final low that should be completed around 2024 - 2025 somewhere below the 71 low that started the cycle (assuming the cycle remains bearish). It is possible (though not likely) that the high of 104 in 2017 was not the cycle peak and that the dollar will push higher before its final correction, but the greenback would have to overcome a lot of resistance to work its way back to and exceed that 104 top. It is also late in the cycle and the top is overdue making it likely that Jan. 3 was it.
There is a current sub-cycle rally (a smaller 3 year cycle within the longer-term cycle) in the dollar that is due to peak soon with a target of 96 - 98. We are approaching that target now. If the dollar stays bearish, this rally should peak within or near that target and start to fall again as the greenback moves towards its final 16-17 year cycle bottom in 2024 - 2025 somewhere below 71 (probably with a brief pause around 81-82). Any move now above 100, however, could be a warning that the U.S. dollar is turning bullish, and we might have to revise our prediction of that low to significantly above 71.
What could turn the U.S. dollar bullish? Well, the Federal Reserve's new chairman Jerome Powell is thought by many financial analysts to be considerably more hawkish than former chairwoman Janet Yellen. An aggressive policy to raise short-term interest rates now would certainly help the value of the greenback. But will this happen? There is already speculation that QT (quantitative tightening - the reverse of quantitative easing) could sink the stock market. Fear of a market crash could easily keep hawkish rhetoric in check and keep the Fed from raising interest rates too fast.
Of course, one of our main concerns with the value of the U.S. dollar has to do with how it will affect the price of precious metals. Normally, a rising dollar depresses gold and silver prices and a falling dollar boosts them, but under certain conditions both the greenback and precious metals can rise together. We may have such a condition now as investors fleeing collapsing European and Asian economies perceive both the U.S. dollar and precious metals as a safe haven investment. A crash in U.S. equity markets could further drive investors into dollars, gold and silver. This should comfort long-term investors in precious metals as whichever way the dollar turns, gold and silver seem poised to benefit. Shorter-term, however, we should be aware of the possibility of gold and silver initially plunging with a severe downturn in the stock market as panicking investors could liquidate equities and commodities to pile into the U.S. dollar as they did in the 2008 - 2009 crash. As I mentioned in a recent blog, those investors soon realized their mistake of "throwing out the baby with the bathwater", and gold and silver recovered dramatically ahead of equities soon after the crash.
A HAPPY FOURTH OF JULY TO ALL READERS OF THE BLOG!