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Can You Spare a Dollar\?

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Much ado has been made about the strength of the U.S. Dollar, so lets see how it has reacted.

US Dollar Index Daily Chart

The US Dollar (DX00Y) has in fact been gaining strength since January. The high point was 120, the highest level since 1985. But that trend has peaked, and since mid-July the Dollar has dipped below the 50-day moving average, and broken the yearlong up trend. The next support test should be 116, the 38.2 percent retracement level. This also marks the top of a congestion area that the dollar traded in during March and April. 114 marks the bottom of this range, and also has the added support of the 200- day moving average. This should be enough support to slow down any declines in the dollar. But companies want the dollar to weaken don't they?

US Dollar vs CRB Index Daily Chart

The general theory is that a strong dollar is bad for U.S. products. If we compare the Dollar to the CRB Index, we can see that the theory holds true. The CRB Index is composite of various commodity prices (oil, metals, lumber, grain, meat, etc.), and prices been dropping since February, while the dollar has been rising. It's not a perfect relationship, but over the long haul, a rising dollar is bad for commodity prices. So now that the dollar is starting to fall, commodity may start to turn. Maybe not next week or next month, but if the dollar continues to fall, commodities should get some relief. A side of beef is quite different than a Cisco router, but the same theory holds true for most exports. The only caveat with a falling dollar is the increased risk of inflation.

Jeffrey Canavan
Assistant Analyst
www.PremierInvestor.com

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