Dollar Downer

I have been warning you for some time that the U.S. dollar is dying a slow death. The pace of the dollar's demise seems to be picking up lately. Protection can be found in all things gold and silver. A 10-15% exposure to precious metals is a must in all portfolios.-Lou

The Greenback Is Broken

THE U.S. DOLLAR INDEX, which tracks the dollar against other major currencies, fell below its important June low of 78.33 late last week. On Monday morning, it was trading at an 11-month low.
The bear trend from March continues with no meaningful support in sight.
Roughly two years ago, when the dollar was in its previous bear market run, the dollar index had moved under a multidecade support level at 80 (see Chart 1). At the time, the subprime-mortgage crisis was just unfolding.

After reaching a low near 71, the dollar spent several months moving sideways until July 2008. Although still several weeks before the stock market started its slow motion crash in September, fear had gripped the world's financial markets. Stocks and corporate bonds were spiraling lower.
But it was just then that the dollar began to rise sharply. Money was moving to the perceived safety of U.S. Treasuries and that sparked the demand for dollars.

When the dollar index moved back above 80, chart watchers with a long-term bent declared a breakdown failure and the technical resurgence of the greenback. Although volatility was huge, the index remained above the 79-80 zone to set up a floor of support. As of Monday, that floor is broken.

With the benefit of hindsight, we can see that financial and economic turmoil was the real culprit on the dollar's volatile comeback. Now as economic news improves and the appetite for riskier investments such as stocks returns, the dollar's appeal is gone. Indeed, we can see in the chart that the final peak in the dollar was roughly equal to the bottom in the stock market.

The big flaw, however, in using the dollar index to forecast trends in the dollar is that it is comprised of a strange basket of other currencies. Further, more than half of its weight is devoted to the euro and that makes it less representative of all capital flows into and out of the United States.
For example, nearly 8% comes from Sweden and Switzerland

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