Sunday, May 15, 2005

Long Term Outlook for US Dollar

I'd like to take a look at the "big picture" for the US dollar. The chart you see above is a monthly chart of the US Dollar index. The two solid horizontal lines are drawn at the dollar index's historical high of 164.72 and its historical low of 78.19. The dashed line is the 1/2 point of this price box while the dotted lines are the 1/4 and 3/4 points.

I think an estimate of where a market stands on the overvalued- undervalued spectrum has to be the first step in making an educated guess of its likely long term trend. One has to remember that markets typically go from undervalued to overvalued and then back to undervalued, etc. Only rarely will a long term trend stop anywhere near the midpoint of the value range, i.e. at "fair value".

With this in mind look more carefully at the dollar index chart. One immediately notices that with the exception of a three year period in the mid-1980's the dollar index has traded in a range between 78 and 121. I judge this to be the value range for the dollar index. Its midpoint is the 100 level and I like to think of this midpoint as "fair value".

I conclude that since the dollar has been trading near the low end of this 78 to 121 range for all of 2005 it is definitely undervalued.

Having determined that the dollar is undervalued, I next want to check the state of public sentiment towards the dollar. See an earlier post on this subject here. There can be no question that the general expectation is that the dollar must inevitably drop from current levels, short term rallies notwithstanding.

From the facts that the dollar is undervalued and that public sentiment is bearish I conclude that its long term trend has turned upward. This means that the dollar index over the next few years should move up close to the 121 level, i.e. to the overvalued level.

Next I want to focus on details that can lead to a more precise estimate of the duration and extent of the expected upswing. Looking at the chart we see that there have been five mini-bull market in the index. Each has carried it up about 17-20 points and lasted anywhere from six months to two years. There were two major bull markets in the index. The first lasted a little more than six years and carried the index up 80 points while the second also lasted 6 years and carried the index up 40 points.

In a previous post I have already explained why Lindsay's mirror image chart for the dollar index is predicting a long term top for 2010. Putting these facts together leads to the following conclusion.

The general trend for the dollar index over the next five to six years will be upward. There should be one and more likely two mini-bull markets of 17-20 points in the index before a more extended upward trend of about 40 points and two years develops. The high of this 40 point upward trend will probably again be near the 121 level and should occur in 2010


Anonymous said...

40 point upswing? Give me a break - long term it's all about the fundamentals and there aren't any.

Anonymous said...

If all you are basing your predictions on is the chart you posted, you are an idiot and need to go back to school, or better yet, find a different job. The dollar is going downhill, and soon will be worth nothing. This is being brought about by US fiscal and buisness policies.

Anonymous said...

It seems the previous two commenters must now be eating crow as risk aversion has caused a flight to the USD, the only true reserve currency in the world, the EURO being a pretender for now. Sure, the fundamentals still suck, and will only get worse in the near term, but for this global meltdown is boosting the USD. Where will it stop? Who knows. Where might one find shelter when it comes crashing down under the weight of those fundamentals? My guess is GOLD.