If you observe the chart you can see that this spring's bounce off of the support region near 85 carried only to the top of the BLUE downtrend line drawn off the 2001 peak before reversing. Also, and I think this is most important, NOT ONCE since the dollar's decline began in 2001, has a long term KAGI chart generated a BUY signal in the U. S. Dollar - NOT ONCE. In order to do that, the closing price would have to break above one of the shoulders and the price line would then change color from red to black according to the manner in which I set up my charts. Notice, it has been all red since 2001. In much the same manner, only the opposite took place - not once since 1999 -2001 did the dollar generate a long term sell signal. The accuracy of the chart speaks for itself in this regards.
I think it is also instructive to keep in mind that our Asian friends tend to employ this style of chart when viewing markets since they were originally developed in the far East. I would think that any Asian Foreign Central Bank official viewing the Dollar in this fashion would be seriously concerned. Perhaps this is a partial explanation as to why they are slowing down their rate of purchases of Treasury Debt.
I continue to marvel at those who are calling for a long term dollar bull market in the dollar to commence whether it is based on some "synthetic dollar short" talk or any other such contrived reasoning. We know that there are many factors that go into determining the value of a currency but most important is the current account deficit of the country in question as well as the inflation rate in that particular nation. A currency may be a high yielder but if the yield is below the actual rate of inflation, all holders of that currency are getting negative real rates of return. Investors will not put up with that kind of situation for long and will begin to abandon the currency.
The dollar would have to put in a CLOSE over the region near 92 for a simple buy signal to show up on this chart. If you notice the multiple Head and Shoulders formations evident on this style chart, you will see that region near 92 is the neckline of the H & S shoulders formation. Markets many times will break down one of these formations and then experience a counter trend rally exactly to the point of the broken neckline only to encounter massive supply and reverse course resuming the main trend. As of now, it appears that this is exactly what has occurred.
By the way, the long term implications of this pattern are simply mind-boggling. It portends a further 30% depreciation in the dollar from current levels to the region near 62. I do not have a time period put on that however, only a projection at this point.
I have seen Forex speculators move in for the kill on various currencies which they felt were inherently weak due to structural problems in the economy of the host nation at large. Central Bank response in those cases is to jack short term interest rates violently upward in an attempt to defend the currency from attack. In some cases that will help to stem the decline. In other cases, Forex players view it as an act of desperation by a Bank playing a weak hand and hit the currency even harder provoking a run on it until rates are hiked to such an extreme level that the attack stops but the domestic economy usually ends up in ruins. Can you say Argentina a couple of years ago?
If the Dollar continues to do what I think it is going to do and the U.S. equity indexes continue to swoon, we will begin to witness a flight out of the dollar as foreigners repatriate funds. That will put added downward pressure on the dollar as demand for U.S. paper declines. Eventually however, paper fiat currencies themselves are going to lose the confidence of a significant portion of the investment world. Gold will then rightful resume its time honored role as THE CURRENCY of choice.
Dan Norcini
August 9, 2004
Dan is a professional off-the-floor commodity trader residing in Texas and can be reached at dnorcini@earthlink.net with comments.
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