US Dollar Losing Steam
Friday, December 12, 2008 19:02The 2008 US dollar rally is losing steam and may be coming to an end. I know that the run up in the currency left many in the financial world scratching their heads. How can the currency of a collapsing economy strengthen? Why, when trillions of new dollars are being created out of thin air, would the dollar be making new highs? I think the short answer is deleveraging.
There’s been massive liquidation across all asset classes. The under performance of foreign stocks relative to the US gives us an idea of the money flow. US fund managers were liquidating and unwinding their foreign exposure and moving to cash or treasuries (US dollar). This means that they were essentially selling the foreign currencies and buying dollars.
The second, lesser known reason, is global central bank manipulation. The flow of money and goods throughout the world depends on the relationship of the US dollar to foreign currencies. A falling dollar is bad for countries that export their goods to the United States as they become more expensive for US consumers. If goods become too expansive to the country which consumes the most, they will buy less causing ripple effects throughout the exporting world. It’s been widely reported that central banks throughout the world have been aggressively buying dollars.
In the end, however, market manipulation can only work for so long. With much of the foreign liquidation behind us, the dollar seems poised for a drop in the coming weeks.
The chart below shows the US dollar breaking it’s 50 day moving average as well as it’s support level of 84.50. The momentum indicators such as the RSI (top) and MACD (bottom) illustrate the loss of upside momentum. A test of 80 should follow in the coming weeks.
A falling dollar is good for commodities such as gold, oil, etc. The reason is NOT because gold or oil is worth anymore this week then it was last week. It’s because what the world uses to pay for these items with (Dollar) has decreased. Oil, for example, is quoted in US dollar throughout the world and so as the dollar weakens, it takes more dollars to buy oil. When the US dollar bottomed earlier this year, oil reached an all time high. Since then, the dollar has rallied and oil has plummeted. The great bull market in oil was NEVER an oil crisis, it was a dollar crisis.
Here’s a short term chart of Oil. The break above the downtrend combined with the bullish momentum indicator suggest that a move up is due.
Below we see a short term chart of Gold which has been moving higher since its October bottom. A decisive close above the blue line would confirm the breakout. Momentum indicator registers a buy signal.
A falling US dollar is also good for foreign currencies.
The Euro (below) has broken out after bottoming in November. MACD confirms the breakout. 
The British pound also seems to be changing direction. The double bottom (red arrows) is generally a very bullish sign. The short term downtrend has been broken which is encouraging. I’d like to see a bit more follow through before turning bullish. A move above 155 needed to confirm.
The Japanese Yen has been one of my personal favorites for 2008. I like this currency because it tends to move in the opposite direction of US stocks. Throughout the last bull market, large investors were borrowing cheap money from Japan and using it to invest in other asset classes such as US stocks (The carry trade). They were, in essence, selling yen to buy dollar based investments. As the stock market unraveled, so did this trade. Liquidations in the US caused the money to flow back to the yen to repay the loans.
The Japanese Yen has just broken out of a decade long resistance level. It’s now at a 13 year high! 
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