Tuesday, April 05, 2016

Dollar's fifth time on the brink

The U.S. Dollar Index is a weighted average of the exchange rate between the dollar and major currencies like the Euro and Yen.  The index started with a value of 100 in 1973 after the dollar was disconnected from gold, and it has since ranged from 165 (in 1985) to 71 (in 2008).  Lately it's been hovering in a range between 94 and 101, and today marks the fifth time in 11 months that it has reached a rising support line, shown in blue in the chart below:


It's only a matter of time before the Federal Reserve Bank lowers interest rates back to zero, or begins printing more money to prop up the stock market, or both, and the index will likely fall through the support line at that time.  It's also possible that foreign investors will anticipate those moves by the Fed before they happen, and if the index breaks below the support line before any Fed actions, it would both reveal that anticipation among fundamental investors, and trigger a bearish rush by currency traders.

This eventual breakdown is precisely why I'm in gold and silver, gold mining stocks, and stocks and bonds of foreign countries with healthier monetary policies.  Americans who are fully invested in U.S. stocks and bonds, or who keep lots of savings in dollars, are going to become much poorer.

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