With Interest Rate Hikes Coming, Can The Dollar Go Lower?

February 22, 2017

First published Sun Feb 19 for members of ElliottWaveTrader.net:  For those that have been following my analysis since I began posting it back in 2011, you know that I do not buy into the common “market speak.”  In fact, when so many were looking for a dollar crash back in 2011, I was calling for a multi-year rally in one of my first public articles:

“it seems we have now completed a truncated 5th wave in a 5 wave move down in the DXY, which means we have now completed Wave 2 down.  Therefore, based upon my count, the dollar will now begin a multi-year bull run.”

July 31, 2011

This meant that, back in July 2011, I was expecting a multi-year 3rd wave rally to take hold.  And, since a 3rd wave often targets the 1.618 extension of waves 1 and 2, that gave me a 103.50 ideal target for the 3rd wave in the DXY in this multi-year rally I was expecting. 

Now, I want to remind you again that when I made this call back in July of 2011, the DXY hit a low of 73.42.  So, that meant I was expecting a 40% rally in the DXY.  Moreover, I also want to remind you that I maintained this expectation when the Fed was throwing their QE bazookas at the market.  For this reason, almost all market participants at the time were certain that the dollar was going to crash.  So, most viewed my call for a multi-year rally in the dollar as ridiculous, and that is putting it mildly.

So, even with all that QE being thrown at the dollar, we still saw a massive rally in the DXY.  Yes, this was certainly counter-intuitive to common market expectations.  But, this was a clear case study in the fact that the fundamentals did not control this market, while market sentiment was the clear driver of price.

As we now approach the next Fed rate hikes, I see many again certain that it will be a catalyst for the dollar to rally strongly.  However, it seems that most are again relying on market “common-think,” rather than reliable analysis when maintaining such expectations.

First, let’s ask what happened when the Fed began raising rates.  The first time the Fed raised rates in years was back in December of 2015.  Does anyone know, off hand, what the dollar did thereafter?   I will give you a hint:  it did not go up.  Yes, you guess it, the dollar topped in December of 2015, and dropped from a high of 100.51 to 91.92 within 5 months. 

The second time the Fed raised rates, the market rallied for only two days towards the highs we have recently seen, and has declined since that point in time.

So, based upon the recent history, do you really think any further rates are going to certainly take us much higher in the DXY?  To me, maintaining the expectation that an interest rate increase will cause the dollar to rally to new highs is the same “common-think” that was wrong about QE and wrong about prior rate hikes.

Therefore, to answer the question I posed in the title of this article, I believe the dollar can certainly drop even after a rate hike. 

More specifically, in my recent DXY updates at Elliottwavetrader.net, I was expecting a rally up towards the ideal target of 101.50.  And, as long as we did not exceed the 102.50 level, I was looking for us to top in a (b) wave rally.  While the market spiked through the ideal target at 101.50, it immediately reversed right back through it, and provided us with an initial topping signal.  Moreover, when we dropped below the 101 region, it provided us more support that a multi-year high has been struck for wave 3. 

And, once the DXY is able to break down below 100, it significantly increases the probability that we have entered a multi-year correction no matter how many rate increases we see.  But, please do take note of the alternative count I have on the DXY, which can still keep it elevated for the next several weeks, before we break down in a bigger way.  But, the greater probabilities are starting to lean towards the potential that a multi-year high has been struck.

See charts illustrating the wave counts on the US Dollar (DXY) at https://www.elliottwavetrader.net/scharts/Charts-on-the-Dollar-DXY-201702191501.html

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education. Visit his website:https://www.elliottwavetrader.net. You can contact Avi at: info@elliottwavetrader.net.

The periodic symbol for gold is AU which come from the Latin for gold aurum.