Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76
Last time I wrote about the beleaguered US dollar, it was just kissing its long term support at 80.
It managed to bounce (feebily) making it the sixth time to bounce off that support line. Alas, it seems there won’t be a seventh as the US dollar has managed to fall through to close around 79.
Take a careful look at this chart of the US dollar index:
Notice anything? It isn’t the recent chart. It is from 1992. Notice how it resembles our more contemporary US dollar index? The rally at the beginning of the year and then the fall into the summer? the fall through long term support?
Something else we have in common with 1992 is that the short term T-Bill rate had started to fall rapidly - ahead of the Fed funds rate. Then, as now, the Fed found itself in the all too familiar game of catch up and repeatedly lowered rates to match the rates set in the freely traded fixed income market.
So what happened to the dollar? Did it crash through the floor and go to zero? Did all hell break loose? Surely with the dollar so weak and the Fed reducing rates like mad, the currency market must have taken the dollar behind the tool shed.
Well, not quite. Here’s what happened next:
Although the similarities are remarkable between now and then, there really is no reason for history to repeat. As Twain quipped, history rhymes, not repeats exactly.
My point is that right now everyone expects the dollar to crash as the Fed lowers rates. But things seldom occur the way everyone believes they should. Popular “logic” has a tendency to be ignored by the market.
And if you recall macroeconomics 101, interest rates are important but there are a few more variables that go into the valuation of currencies. I have no idea whether we’ll see the 1992 rally repeat, but frankly, it wouldn’t surprise me.
Here’s a recent weekly chart for comparison:
Enjoyed this? Don't miss the next one, grab the feed or