The US Dollar Index

[Ataglance2]

US Dollar Bear 5

Adam Hamilton May 11, 2007 3273 Words

With the headline US stock indexes doing so well this year, they are understandably absorbing trader attention and news coverage like a black hole. It is always exciting to see major new round numbers achieved and new highs carved. But other markets outside of this limelight are not frozen in stasis.

In particular the US dollar, seemingly totally forgotten in the dark shadow the stock markets are casting, has been exceedingly interesting. While you wouldn’t know it from the mainstream financial media thanks to very little commentary on it, the US dollar’s secular bear market is very much alive and well. In fact today it is on the verge of testing major major new lows.

If the dollar indeed continues on its stealthy downward trajectory and hits these new lows, the implications will probably be profound. Especially for American investors and speculators, the dollar is the linchpin of everything financial. When foreign investors see new dollar lows, will the massive inflows of capital they pump into our financial markets waver? What would this mean for US stocks, bonds, and interest rates?

As always in financial-market analysis, perspective is everything. In order to really understand just how critical the US dollar’s technical position is today, it is best to start with a tactical view and then zoom out to the little-considered strategic view. The precarious levels at which the dollar trades today are remarkable to ponder in historical context.

The most popular way to track the dollar’s fortunes is via the NYBOT-traded US Dollar Index, or USDX. It has been around since the early 1970s and measures the US dollar against a trade-weighted basket of major world currencies. Today the USDX is dominated by the euro, with a 58% weight. The Japanese yen weighs in at 14%, the British pound 12%, the Canadian dollar 9%, and then the Swedish krona and Swiss franc round out this geometrically-averaged index.

The actual USDX number shows where the US dollar is trading today relative to a March 1973 indexed base value of 100. Thus if this index is above 100, then the dollar is relatively more valuable today than it was in 1973 compared to these major currencies. If it is below 100, then the dollar is relatively less valuable. Today it is challenging 80, a hyper-critical number I’ll discuss later.

In addition to the USDX and its assorted technicals, the charts in this essay also include the relative dollar. Based on my Relativity trading theory, the rDollar is computed by dividing the USDX by its own 200dma. The daily result is then graphed over time and it effectively condenses the dollar’s behavior relative to its 200dma into a horizontal constant-percentage band. Eventually the rDollar forms a trading range within this band, granting traders excellent insight into high-probability-for-success long and short points.

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