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How Much Higher Can The U.S. Dollar Go?
Submitted by Charles Hugh-Smith via PeakProsperity.com,
Let’s start our examination of the U.S. dollar (USD) by recalling the chart from my August 2014 essay, Why the Dollar Could Strengthen—A Lot. At that point, the USD had moved modestly off its lows, and had yet to challenge long-term resistance around 80.
Here’s the same chart of the Real Trade-Weighted U.S. Dollar Index now:
The USD broke out of its multi-year downtrend and soared above 100. Needless to say, the USD did in fact strengthen a lot. After that initial leg up, the dollar has remained in a consolidation range for much of 2015. Though it recently broke out of a wedge/triangle formation to the upside, it’s not yet clear if this is a definitive move higher or more consolidation.
Is the Dollar Rally Done?
So is the dollar rally done, or could it move higher?
The long-term chart above (Real Trade-Weighted U.S. Dollar Index) offers some clues.
Our first observation is that trends in the USD tend to last for some time, so if this rally follows the pattern of previous rallies, it’s unlikely to have run its course in one year.
Secondly, previous rallies paused for a multi-month consolidation period before launching upward for the second leg of the long-term rally.
Thirdly, the USD rose sharply to previous peaks and then round-tripped back to the 80 level.
This raises the question: How high could the dollar rise in this rally?
How High Could the USD Go?
How high could the USD rise before it tops out? Last November, when the dollar had just punched above 85 for the first time in years, I posted this chart that suggested 120 was “not impossible:”
The current rally has already made it halfway to this target (from sub-80 to 100+). If we look again at the FRED chart above (the current Real Trade Weighted Dollar Index), we see that the consolidation periods have occurred roughly mid-way in the rallies. This is supportive of the idea that the initial 20+ point advance could be followed (after the consolidation phase ends) by another leg higher of approximately the same size (20+ points).
That would get the dollar Index to the 120 target.
Beyond 120, there are additional “impossible” targets defined by previous rallies: depending on the chart (Real Trade Weighted Dollar Index from FRED, DXY or USD on charting services), these targets range from 130 to 165.
Who Would Suffer If the Dollar Moved Higher?
Any move higher in the dollar would encounter serious resistance from everyone whose positions, sales and profits would be negatively impacted by a soaring dollar.
Any move above current levels around 100 would cause tremendous pain for many powerful participants. U.S. global corporate profits, already under pressure from the stronger dollar, would suffer from the worsening exchange rate, and that would pressure U.S. stock markets that are at least theoretically based on profits.
Recall how FX (foreign exchange impacts U.S. corporate profits:
- Major American corporations get 40+% of sales and 50+% of profits from overseas markets denominated in other currencies.
- One euro of profit earned in the EU translated into $1.40 in profit a few years ago. Now the same 1 euro of profit converts to a mere $1.07 in profit when stated in dollars.
- That’s a 24% reduction in profit, just from the strengthening dollar.
The effects of the stronger dollar on profits is visible in this chart. Note that while pundits and apologists are quick to blame “weather” for lagging sales, corporations overwhelmingly identified the rising USD as the cause of profit warnings, not the weather or geopolitical issues.
Everyone who took out loans denominated in USD while their revenues/earnings are in a currency that’s losing value against the dollar will suffer as well.
If an enterprise earning euros borrowed in dollars when the euro was 1.40, consider what happens to their USD-denominated loan payments now that the euro is 1.07.
Where is once took only .72 euros to pay $1 in principal and interest on the dollar-based loan, now it take .94 euros to pay that same $1. That’s a 30% increase in loan payments, just from the rising dollar and the declining euro.
This dynamic is even more punishing to those who borrowed dollars to fund carry trades in other currencies.
What is a carry trade?
As my PeakProsperity.com colleague Davefairtex explained last year:
Carry Trade For Dummies:
Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.
Step 2) Trade $1 billion US for 1.075 billion AUD (Australian dollar).
Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%
Step 4) Collect $23 million USD/year for doing no work at all.
If the currency the bond is denominated in rises in value against the USD, traders get a bonus gain from the appreciation. For example, those who borrowed yen to buy U.S. Treasury bonds have reaped a nice profit as the USD has rocketed higher against the yen.
But the reverse is less pleasant. As the USD rockets higher, the profits earned in weakening currencies decline when stated in dollars, while the amount due on the dollar-denominated loan has soared when the payments are converted to the local currency.
Using our euro-USD example: the profit on the carry trade plummets (when converted to USD) while the amount of euros needed to pay the loan in USD soars.
A rising USD is a double-whammy to carry trades based on borrowed dollars.
The sums of money being gambled in carry trades are enormous. According to the Telegraph newspaper (U.K.), roughly two thirds of the $11 trillion in cross-national loans are denominated in U.S. dollars. That suggests that over $7 trillion in carry trades have turned sour.
If the dollar continues rising, those sour carry trades quickly become catastrophic for everyone who borrowed dollars to buy assets in a weakening currency.
Everyone who took loans denominated in dollars needs dollars to service the loan and pay it off. That demand is clearly one factor pushing the USD higher.
In Part 2: Why The Coming Currency Crisis Will Push The USD Higher, we detail why we can anticipate the next global financial crisis will originate in the currency market, and how this will inevitably push the USD higher, which will increase the pressure on carry trades, adding fuel to the USD fire. Perhaps ironically, a much stronger dollar will put tremendous downward pressure on U.S. stock markets in 2016.
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
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how low can the euro fall?
It can go as high as the world can get bad.
Yeah yeah yeah yeah .... I know I know I know all about bad dollars.
Fact is at this moment, the flight to safety fiat currency is still the USD. Along with SF ....
shrugs
Will the Euro (or the European Union) still exist 5 years from now?
Teh real question is how much higher Bitcoin can go? I mean, FFS! Nobody owns this currency and it's already by far teh strongest, most valuable currency on Earth! We can only imagine once the monies start rolling right in! But hey, you're all into gold right? Yous gots teh winning horse? Feeling pretty confident about that?
I'm pretty sure I will still have my silver coins when you are disassembling your worthless computer trying to recover the silver used in its manfacture after your bitcoins have disappeared into the ether!
Just to keep some perspective ... the stern of the Titannic kept rising higher and higher, too.
That's a rhetorical question, depends on how low the other currencies will be allowed to go before the fed weakens ours.
Yes. I think other currencies are talking. I do get 121 and sooner rather than later. I have assumed that this referred to an event encompassing so much of the rest of the world that yen, yuan, euro would all be horribly affected. Best argument for bad outcomes in the ME idiocy...
So you will be able to buy the entire Universe with one fiat dollar.
Muh pretty sure that it will be teh other way around and your ASE will be melted down to make Bitcoin miners.
Bitcoin's value lies in marketing, so there's no limit to its up or down movement.
A lot like Pet Rocks.
"Will the Euro (...) still exist 5 years from now?"
interesting question. let's say all 19 countries that adopted the EUR go back to their national currencies. that's easy, btw, because each of them still has it's own national bank
option one is that the EU is still around. since it's an org that is funded by it's members, all sovereigns with their own armed forces, and those contributions are calculated in EUR. it would go on
option two is that the EU is disbanded. again, that's easy, with the small impact of dismissing some 40'000 employees. (more interesting would actually be where the same amount of lobbyists would go, but I digreess)
in this case, who would want to disband the ECB as such? and what for? it's self-funded. it provides... a service, i.e. a currency. it has it's own reserves
take my case, or that of many small and medium businesses in Europe. do we want to go back to accounting ledgers in a dozen different currencies? hell, no
so whoever is using the EUR for business and has business in several european countries... would switch to a double-ledgered accounting, in the national currency where the company is based and an EUR side, just because it's so handy for price calculation
in Europe, in most countries you can have your accounts in whatever currency you want anyway, so for many companies, even stock-listed ones, it would even make sense to keep the full EUR accounting only
so yes, the EUR, like any fiat currency, can die, by hyperinflation. though then you have to discuss it in terms of FX reserves
otherwise... nope. the EUR will go on until it hyperinflates, like any other currency (with the exception of gold, of course)
gold in Europe trades at near 1500 dollars compaired to a year ago.
Silver eagles cost about 17,7 euro's, that's almost 22 dollars compaired to a year ago.
Pretty expensive no?
So that's why I think when the dollar goes back down that gold and silver will skyrocket higer. So when the euro goes to 1.15, It's time to load up on gold and silver again.
@ ebay and they are selling 1 oz.Valcambi Suisse Gold bars for $1,086. Delivered.
Something is going down, folks ... that's below paper spot prices....maybe those saying it could go down to the 800s are right...
http://deals.ebay.com/5002397393_1_oz_Valcambi_Suisse_Gold_Bar_In_Assay_...
that is NOT below the gold paper spot price. XAU has been below that value for atleast 3 days now.
So you're suggesting that there is a carry trade in gold and silver? Buy it in US and ship it for sale to Europe? Hmm.... shipping rates are cheap right now. I only need to get my hands on some gold and silver....
Wait? Wasn't the Dollar supposed to plummet according to all the gold bugs? Where is Mike Maloney? Where is Peter Schiff? Where is Jim Rogers?
Oh yeah, nice ploy to to people to enroll in PeakProsperity for 30 cold hard US Dollars per month, because the article is missing the essential points about the future direction. Can I also pay €30/month...? LOL!
Mike and Peter tell a lot of smart stuff but they're both billionaires who make a shitload of money in their bizz.
So don't buy everything they say.
Also, I don't really trust Mike anymore for over a year now because he's not that coherent in what he says. He promotes up and down and whatever the market does, he says he predicted it right.
Mike Maloney has said on many occasions that first there will be deflation, then hyperinflation. The dollar going up is consistent with that forecast.
What exactly are you LOLing at in your comment?
Judging by the level of bullshit on their stock market it might well have more to go.
To me it's about as attractive as a 1st class ticket for the Titanic's last journey.
"How High Could the USD Go?"
wrong question....
"What does a USD purchase today?"
ur welcome....
No disrespect intended, Kaiser, but your question shouldn't be addressed just to Americans. To people living in other places (i.e. where US Dollars aren't used for purchasing, a USD buys a whole lot more than it used to do. I have a son who lives in Norway; my wife and I are planning to retire to Mexico or maybe Europe somewhere (somewhere warm, that is) or even Australia, where we came from many years ago. Our USD savings would buy our family a boatload more stuff today than it would have done a few years ago.
In another few years, it will hopefully buy us even more. I realise that most ZH readers are US citizens and US residents with no intention of leaving - but not all of them!
$1 used to be a generous tip.
"planning to retire to Mexico or maybe Europe somewhere (somewhere warm)"
BB, I'm in the same boat. If a beach is important, then Mexico is a good option. If you don't need to swim in the sea then Malaysia is a great place to be - first world living at third world prices and you can easily get by in english, but the jellyfish are nasty. I'd love to check out some cheaper places in europe on the Med but I'm going to wait a while to see how the refugee situation pans out. Colombia was surprisingly nice and the people were the friendliest I met in south america (fantastic coffee too) but I haven't been to brasil yet. As for Australia I'd like to have a closer look at townsville and parts of WA, both of which are a little cheaper than NSW. Housing on the gold coast isn't too bad either.
you might look to SA and Vic as somewhat safer re jellyfish issues
but not shark free
no where really is in Aus
prices in both are better than nsw wa or qld..depending on what area you choose
you want yuppified townhouse on a canal. then be ripped off a lot, everywhere.
normal home beachside towns bearable prices.
What type of confetti is this dollar that you speak of? Remember that.
God has spoken!
It seems my dollar is quite well broken. Can't even get a hooker for a buck anymore.
The "correct' question should be... " How much more jawboning from the ECB, and BoJ, with equities pushing ATH, and P/E ratios even moar stupendous, and the PBoC resorting to jailing fair market pricing, can humanity withstand?" :-D lmfao.
Today I just dropped my dollar positions and went back to euro's.
It was a good bet while it lasted but now I think that the tide will turn for some reason and if not then I took my profits :)
But one big casualty of the strong dollar is tourisme, it's now a shitload cheaper for Americans to go outside of America and foreigners will avoid America as it's way to expensive now.
I think that was a good decison S/D. What's the benefit of more ECB -QE, for the serfs?
I see the DAX at idiotic levels again, and NOTHING has changed. The cash is flowing into the equity and bond markets, not demand driven growth.
The central banks of the world are playing the " waiting game".
The perceived Jihadi terror doesn't help tourism either. My wife wanted to go to Europe for vacation in 2016. Now she wants to revisit Canada. Said she likes the Chinese food in Vancouver. ;-)
There used to be a very nice Chinese restaurant in Damascas as I remember.
Seperate vacations are good for a marriage.
Good French restaurants in Beirut, very good value. Regarding the Arabs and Syrians. I found them to be very intelligent, easy to make oneself understood, even without any Arabic. Not true in Turkey.
We live outside the US. Recently we have seen where local companies producing local products are raising their prices simply because the 'parent' companies are US based - and they dictate the pricing. It seems like the US companies are expecting a certain profit (in relation to dollars). If the dollar goes up - you need to pay us more of your currency.
(I probably didn't say that well).
Makes sense, if those US companies are listed, their EU parts dropped 30% in revenue just because of the strong dollar.
It's actually a very point that you made why the US stockmarket may start to crash after the Q4 reports.
Does anyone bother to see how the dollar index is calculated?
https://www.theice.com/publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf
The "value" of the dollar can be anything TPTB want it to be, just like LIBOR, precious metals, etc. FUBAR!
If the dollar is going up, why does it buy less and less at the grocery store? Why can't anyone afford to buy a house? Are houses becoming so much more valuable that they cost even more of these "more valuable" dollars?
Wouldn't it be more accurate to say that the dollar is losing the race to the bottom? The dollar is losing value as the crony-capitalists steal from the rest of us by "printing," but the crony-capitalists controlling other fiat currencies are printing them even faster.
Wouldn't it be more accurate to say that the dollar is losing the race to the bottom?
It is. But not the way I think you are suggesting. It's losing in the sense that it will be the last to hit bottom.
If the dollar is going up, why does it buy less and less at the grocery store?
Not sure. But it might be because retailers are pocketing their savings from lower commodity prices.
Are houses becoming so much more valuable that they cost even more of these "more valuable" dollars?
Home prices peaked and are now in decline. Maybe too early for you to notice.
In a word:
Weimar
buy a stack of gold bullion bars denominated in euro, hold them for 5 years, then sit smug as the fiats race each other to the bottom
www.teamramgold.com/about-us
last chair and the music is stopping
when the music stops nobody is going to need a chair
For the last 40 years I have heard the Japanese yen was a safe haven currency. As I have gotten more aware of finances and economics and how they work I came to realise the yen is the worst possible place to pin your hopes. Yet the yen is still touted as a safe haven?
I couldn't begin to guess how high the dollar will go. What I do see is that in a world where currencies are collapsing everwhere, the dollar is the only safe haven for big money. Gold and silver are not on their radar; the market is too small.
For now, forget hyperinflation. Get used to hyperdeflation.
Every country that is going through a slow motion economic implosion - Brazil, Portugal, Venezuela, Ukraine is absorbing dollars. Rats run for high ground, even if it's part of the same sinking structure. With currencies being destroyed left and right dollar looks like it could last an extra day or two and since it is globally traded, it offers a quick and easy alternative in places where price fixing depleted supply of essentials and where gold and silver had been looted by the international bankers.
Dollar represents the best seat on the Titanic.
how could anyone downvote your comment, fucking idiot in every crowd. reason i hate people in general-fuck u and u know who u r...
He started out fine, and then went full retard paranoid.
The previous peaks were set when we had and expanding economy and increasing interest rates. The only thing holding up the dollar now is the hot air from Yellen's... Wherever...
I'm wondering whether the Pfizer inversion was to avoid the tax or the dollar.
ha both...
It's win win double plus good
Insanity is doing the same thing over and over expecting the same result
Every beginning has an end
Everything that goes up , comes down
A flame burns brighter before its put off
No worries about the carry trades. The dirtiest laundry in the basket (US$) still has legs. What has a reserve currency got to do with global S $ P companies who are not idiots in not hedging their global businesses. How naive to think that they hold unhedged US$ as stores of values. You play with more naked Central Banks than the Fed and call their bluffs. That's the game.
Good article as far as it goes. I hate teaser articles that make you pay $360 per year to read the conclusion. Technical analysis--Are we really supposed to go on the basis of old fashioned technical analysis (consolidation triangles, etc. give me a break!)? This doesn't even work for stock trading. What, no Fibonacci support and resistance zones?
I do like what he said about carry trades and currency effects on corporate profits.
Looking at these charts, How many times can you make a dead cat bounce ?
If the dollar soars the global economy will become totally unhinged. Almost more important than the Fed's interest rate is the value of the dollar in comparison to other currencies. For years I thought the dollar would succumb to market forces and predicted its demise. I now concede my failure to grasp the larger picture made me rather shortsighted.
While I concede the dollar is nothing to brag about as the world reserve currency the dollar is still the most liquid and the safest of the four major currencies. In an unstable world liquidity becomes very important. More on why the dollar is about to soar in the article below.
http://brucewilds.blogspot.com/2015/08/dollar-about-to-soar.html
Weren't the middle eastern wars placed to create the continuous demand for dollars and euros. What happened?
I believe that humans along with the stock markets are " Irrational" a human emotion that can be produce volatile market moves when a large number of people subconsciously act to news. Below is a link to an indictors that provides a level of high sentiment or either bearish or bullish reading to determine when to captilize on these such moves
https://www.sentimenttiming.com/antoemang/13