In the early 1970’s most countries broke free of their currency being tied to gold or to another currency. Since that time the US Dollar has been on a decline against many currencies.
This drop in the Dollar has provided many people with the wrong argument assuming that gold kept the Dollar strong, and that if we were still on the gold standard the Dollar would be worth a
Well, the Dollar would most certainly be worth more but at a great cost to the US and the global economy. Just image now if the US had the Dollar pegged to the price of gold; inflation would be outrageous and
the economy would be in even worse shape than it is currently. Gold rallied
to $1900 per ounce while the world economy sank into the abyss. This would
have caused a very serious stagflation event; very high prices during an
The reasons for the decline of the Dollar over the last 40 year period has
more to do with the way the US economic structure has evolved from a
manufacturing based economy to a service based economy. During this time
the US innovated many products only to have them manufactured elsewhere for
a cheaper price. A change in economic structure is only natural as
companies try to gain the most profit possible.
Additionally, another reason for the decline in the Dollar can be attributed
to the US being a source of wealth for many people around the world. The US
has experienced greater outflows to other countries than other countries
have placed into the US. This has happened through various channels;
purchasing of cheaper products from other countries, buying of natural
resources from other countries, outsourcing of US talent to other countries
as well as the US providing a great deal of financial support to many
countries both to individuals and governments. All of this has caused net
outflows from the US to everywhere else in the world. This is one of the
reasons the US trade balance has been negative for that same 40 year period.
There appears to be a change on the horizon as many countries’ wages and
costs climb. Additionally, a fundamental change is taking place in the US
with renewed emphasis on cheaper manufacturing processes, shifting
manufacturing back to the US. These changes coupled with a boom in new
technologies are once again internalizing the US economic structure. It is
balancing the country’s overall import/export ratio and changing the future
dynamics of the US economy.
Change many times is a good thing. There is an old saying, be careful what
you wish for you might just get it. This may be the case for those wishing
for change to a stronger Dollar. As the US economic structure changes
because of technological advances and the overall global economic balance
changes, the US Dollar will once again reign supreme.
Dollar strength will cause inflation in other countries to increase. Other
countries will be forced to adopt the new technologies in order to compete
and rein in on their inflationary pressures. As the US once again becomes
more self sufficient in its economic structure the overall worth of the
country will stabilize ushering in a long stable global economy. The
problem will be lower growth for everyone globally. Two to three percent
growth will become good, expected and acceptable by everyone globally.
As this stabilization occurs three currencies will emerge as world leaders
in trade; the Euro, the Chinese Yuan (Renminbi) and the US Dollar. While
all this is not going to happen overnight it has begun and will take about
30 years to complete. It is like turning around a 747 airplane or a massive
ocean liner; it takes a lot of time and a great distance.
By 2045 the global economic structure will look very different and will be
completing the cycle started by the 1944 Bretton Woods monetary agreement; a
100 year cycle.
Price charts going back about 40 years cannot capture the full dynamics of
what has happened since that 1944 agreement. However, we can look at some
historical pricing to see that at the end of World War II through the
beginning of the 1970’s exchange rates were fixed and fairly stable.
Currency exchange rates for the Yen were ¥360 per US $1, D-Marks (now part
of the Euro) ranged from 3.20 to 4.20 marks per US $1, and the Pound
Sterling was 2.80 to 4.00 to the US $1.
Two of the most dramatic moves for which we have data going back to the
early 1970’s are the Dollar against the Japanese Yen and Dollar against the
While the monthly moves associated with the Dollar are not exactly the same
for all currencies, these two pairs do fairly represent the overall longer
Looking at all this history can help to technically predict the Dollar’s
future moves. Markets are made up of peoples’ emotions and perceptions.
Because of this, markets will always seek their equilibrium level. As an
analyst it then becomes easy to predict the market’s moves, all we have to
do is find the market’s equilibrium.
In the case of the Dollar Yen we can visually see an equilibrium level that
is between about where the market is right now 100/101 to about around 150,
the top end of the range for the last 20 years. With the Swiss Franc it is
a little more difficult to determine but it ranges from about 120 to around
180. If we were to do the same measurement with the Pound Dollar we would
get something around 140 to 180. The difficult one to ascertain is the Euro
as it is made up of so many valuations since the early 1970’s. More time
will be needed to technically call the Euro’s equilibrium.
The point of this article is to show the impending change in the US Dollar’s
direction. Using only the Yen and Franc charts is not the best statistical
representation of Dollar data but they do provide a good visual of the long
term impending change.
In the Dollar Yen chart is a trend line that goes all the way back to the
early 1970’s price of 360 Yen to the Dollar. In January this year, 2013, we
closed above that trend line for the first time and have stayed above that
line. Technically this marks a price breakout. We saw the first technical
break in February 2012 (the smaller red line below the long red line) when
the Dollar broke a 4-year trend line. This was after making extreme lows
not seen since the currency turmoil during WWII.
The Swiss Franc reversal formation was a little more dramatic as in a matter
of days the Dollar dropped over 10 cents per Franc only to recovery in just
as many days. Normally a 2 cent move is fairly extreme so in August of 2011
when the Dollar dropped over 6 cents in one day, signals were very clear
that the Dollar was at an unstable extreme.
In both the Yen and the Franc their respective central banks intervened
after their respective currencies made those extremes. As usual they were
late to the party, intervening only after their currencies hit the extreme.
With or without the intervention the Dollar was making a bottom and none as
dramatic as against the Franc. That spike low is a technical formation that
will hold for a very long time; probably many decades.
Now the Dollar Swiss is on the verge of breaking its multi-decade downward
trend just like the Yen. On the included Dollar Swiss chart are two red
trend lines. The first line goes back to the year 2001 when the Dollar
started its recent steep slide. The second goes all the way back to the
early seventies rate of over 4.00 Francs to the Dollar. The drama now stems
from the fact that the market made an extreme spike low two years ago and is
currently pushing higher against both long term trend lines.
Just as in the Yen a breakout by the Dollar will occur with extreme
violence. On a monthly basis the Dollar will close at 103 Francs or higher
and for several months will march ever higher.
In all Dollar crosses the breakout may happen at different times but the
movement will be swift and extended. Once started the upward Dollar move
will last for several years pushing ever more into its cross’ respective
As a special note, many may question why the Dollar Index is being analyzed.
There are several Dollar indices that have been developed and in use.
Unfortunately none of them truly reflect the whole value of the Dollar.
This is mostly due to the fact that several currencies do not float or trade
in the open market; the Chinese Yuan, Indian Rupee and the Brazilian Real to
name a few. These are very large trading partners of the US and should be
included in any Dollar index calculation. The Dollar Index traded in the
futures market is weighted most heavily towards the Euro with which the US
does a lot of trade but not to the extent that the weighting warrants. The
Index also does not include the Chinese Yuan for which the US is a very
large exchange partner.
The impending structural changes that are taking place forcing the Dollar to
make a major reversal may be hard to see now, but as time progresses we may
all look back and wonder why we didn’t see such an obvious reversal. This
is not happening overnight and there will be many days, weeks or months that
the Dollar declines in value creating minor corrections. However, over the
next 10 year period the Dollar will once again become the “go to” currency.
From an investing standpoint if you can stomach or avoid those corrections
and plan for the long term your rewards will most certainly exceed your
losses. It is time to be Dollar long for the foreseeable future.
By Timothy LuCarelli, Chief Analyst at Fx Addicts
Published: Friday July 5, 2013