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Is The U.S. Dollar In A New Bull Market?

Tuesday, November 15, 2016 5:25
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From Taki Tsaklanos: There is a lot of debate whether the U.S. dollar is in a bull market. Many believe that because of the monetary easing policies of the Fed, that the dollar should actually be declining in value.

While that could be an outcome, it is not a “must,” as it all depends on how global markets will evolve over time (since the dollar is not trading in a vacuum).

The U.S. currency is acting very strongly recently. It clearly has bullish energy, with the PowerShares DB US Dollar Index Bullish (NYSE:UUP) rising more than 3% over the past three trading sessions. The key question we try to answer is whether the U.S. dollar is in a long term bull market.

According to this Forbes article from earlier this year, there was no confirmation yet of a U.S. dollar bull market. The article is based on chart analysis, similar to our work. However, we see that the author did not identify all major trendlines. In fact, by far THE most important trendline was not discussed in the article.

The key trendline within the U.S. dollar bull market

The point is not whether there is a bull market in the dollar, the question is how strong it will be.

By far the most important trendline in the dollar’s bull markets is shown on the first chart, a 33-year chart. In December of 2014, the dollar broke out of its bear market, represented by the long term descending trendline which connects the peaks of 1985 and 2001. Since then, the U.S. dollar is in a clear bull market, marked with the circle on the chart.


Implications for global markets of a sustained U.S. dollar bull market

Make no mistake, if the dollar index will trade above its 101 level, there will be a sustained bull market. The implications for all markets globally will be huge. This is what will likely happen:

  • Most commodities will suffer, without any doubt.
  • The ongoing strength in base metals could continue if Mr. Market believes that economic conditions are improving, but we do not expect a huge bull market in base metals if the dollar continues its bull market.
  • Gold and silver will lose value.
  • Stock markets can go both directions, it really will depend on intermarket dynamics. In other words, stocks will follow the primary trend. If the U.S. dollar will be so strong that it will create panic, similar to what happened in 2015, then stocks will suffer. However, if the U.S. dollar bull market will be ‘soft’, then we would not exclude strength in U.S. stocks, and emerging markets will likely be ‘contained’ in such a scenario.
  • Global currencies will feel (serious) pressure.

It is mandatory for investors to follow closely what the U.S. dollar will be doing in the coming days and weeks, in particular around current levels.

The UUP closed at $25.84 on Monday, up $0.25 (+0.98%). Year-to-date, the largest ETF tied to the U.S. dollar has risen 0.74%.

This article is brought to you courtesy of Investing Haven.

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