The Fed’s words and its internal projections are very clear that interest rates are going to rise at a slower pace than most observers expect, and the ultimate destination is lower than most observers assume. That now has at least one Wall Street firm (Goldman Sachs) telling its clients that the Fed might launch the interest-rate upcycle with a “mini” hike that is less than the 0.25% the world expects — echoing what I first laid out in August to readers.
The upshot is a weaker dollar — which means stronger foreign currencies and rising values for foreign assets.
But the question to answer is: How low does the dollar ultimately go when the reversal is in full force?
If the Fed begins raising rates with a mini hike it will send a very strong message. The message: That we, the Fed, realize America cannot afford a strong dollar because of the negative implications on a U.S. economy that remains weak in the knees. Exporters are already feeling the pain, with many reporting negative currency adjustments to their profits. Corporate earnings are already suffering and are likely headed for an “earnings recession” because of this (which would send U.S. stock markets lower). And foreigners cannot afford to invest in the U.S. because their currency doesn’t go as far anymore.
What the Fed absolutely needs is a global economy that is growing at a pace that prompts central bankers around the world to begin raising their own interest rates. That will give Yellen & Co. the cover they need to raise rates here — albeit at a slower pace. That will narrow the interest-rate differential between the dollar and global currencies, and when that happens, the dollar falls and investors no longer think about the dollar in safe-haven terms but in terms of the underlying fiscal health of the country behind the currency.
And we all know how poor American finances are.
Instead, I will share with you the single most important chart on the dollar — the 42-year history of the Dollar Index:
This chart, based on data supplied by the Treasury Department, tracks the U.S. dollar value vs. a basket of global currencies. It starts in 1973, when the dollar was finally untethered from gold and floated freely in the global currency market.
The overarching trend is clearly down, with lower lows and lower highs. As I have written before, you can track the major rises and major falls in the dollar based on the fundamental changes in U.S. fiscal health.
As the upper trendline indicates, the dollar is at or very near its top. It certainly could push a little higher in a euphoric blow-off, since most bubbles end that way (and given the near vertical move up in the last few months, I would argue we’re seeing that euphoric blow-off now).
Whatever the case, we are obviously approaching a zenith for the buck. The next move is down.
The question is: How far down?
Profit From a Weak Dollar
The numbers in the chart above give us some good guidelines to determine where the dollar is ultimately headed when the reversal takes hold.
From trough to trough, the dollar tends to lose 12% to 13%, meaning the new low it sets is typically 12% to 13% lower than its previous low. A similar move would ultimately put the Dollar Index in the 61 range, which would mark a 33% decline from current levels — which happens to reflect the general level of decline the dollar sees from peak to trough.
Of course, gauging the future is never so specific. The factors that push and pull at currencies are different from one trend to the next. Nevertheless, the dollar’s coming trend is down, and by my analysis, the greenback is on its way to the mid- to low-60s before the downtrend is complete.
Those assets will rise in value in U.S. dollar terms, even if their nominal price doesn’t change. And if their prices are going up, then that’s a double-barreled win for U.S.-based investors because you get the gain in share price as well as the gain in currency terms (the value of a euro-denominated stock, for instance, will buy more dollars back at home when you sell the shares and repatriate the cash).
And to sweeten it even more, if the foreign stock pays dividends, the value of the dividends you receive continue to rise in dollar terms as the greenback declines in value.
This is the future of the dollar. It has risen in value for several years now and is clearly near its top. Prepare yourself now for the next stage — down — and the statistical likelihood that the decline will see the dollar fall 30% or more.
This article is brought to you courtesy of Jeff D. Opdyke.