The U.S. Dollar Index® is computed using a trade-weighted geometric average of six currencies.
The six currencies and their trade weights are:
The twenty-year picture
While the past is not always a reliable guide as to what the future may bring, it can give us a hunch of what may lie ahead. The chart below reveals one thing for sure: the USD-dollar has lost more than 30% against a basket of foreign currencies over twenty years, but not in an uninterrupted line of course.
We also note that after a sharp fall that touched bottom first at the end of 1988, sharp rallies followed, up and down.
We wrote in November of last year: "This could be an indication as to what lies in store for us!" and we concluded that the present rally (2005) may be followed by a sharp reversal in the coming weeks or months. And indeed, in December of last year, the USD started to resume its down-trend.
So let us examine in more detail what could be the future direction of the US dollar against the basket of currencies displayed above.
The long-term picture
The US Dollar moved through a significant down-trend line in March 2005, setting in motion further buying activity, also supported by a trend towards higher interest rates in the USA.
During the summer months, we registered a first peak at 90.77 followed by a second, higher one, at 92.63. At this stage, the dollar sold off again, recovered again, but did not manage to go above 92.63.
A classical head-and-shoulder pattern emerged which is now complete and promises further down-side pressure for the US-Dollar.
Fundamental considerations do not favour a strong US Dollar. The problems remain and interest rates in the USA are unlikely to move much higher in the near future.
U.S. NATIONAL DEBT CLOCK
The outstanding Public Debt as of 23 May 2006 at 10:00:07 AM GMT was:
The estimated population of the United States is 298,764,565, so each citizen's share of this debt is $27,949.48. This debt per citizen increases by about $ 100 each month.
The National Debt has continued to increase an average of $1.77 billion per day since September 30, 2005! Concerned?
You should not forget to add the private debt!
The medium-term picture
This reversal pattern suggests that it is highly unlikely that the US Dollar Index will move back to a level above 90 points. As a matter of fact, the drop through the neckline of the formation down to the level of less than 84 and the subsequent pull-back towards 86 points, at which new selling pressure emerged, would favour a further decline to much lower levels.
Last November, we gave you the twelve months forecasts for the US dollar against the Swiss franc of five major banking institutions with an average target of 1.22. At the moment of writing, the exchange rate is 1.2083:
At present, it appears that UBS is likely to be the winner and Bank Sarasin the loser.
The short-term picture
"For the time being, we would remains short.", we wrote in November of last year and now we have even less reason to change our opinion.
The recommendations were valid at the time of writing, viz. at
and may no longer be relevant at the time of reading.
Peter Zihlmann
www.pzim.com
investment@pzim.com
invest@pzim.ch
May 26, 2006
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