From Taki Tsaklanos: The U.S. dollar is moving to a 13-year high. This is breaking news, and medium to long consequences of this event should not be underestimated.
In general, the U.S. dollar has an inverse relationship with commodities. As the dollar rises, commodities tend to sell off. Because of that, a rising dollar is said to be deflationary.
As explained in Copper Price At Secular Breakout Point, copper is about to start a new bull market. The question on the mind of many investors is whether this ‘makes sense’, in other words is it possible for copper to rise along with a rising dollar.
The answer to that question is very simple: the dollar is rising at a time when fear assets are breaking down. With fear assets, we refer to gold, the Yen and treasuries. Risk is returning to the market; consequently, fear assets are being sold. Because of that, rates are rising, and that implies a stronger currency.
The ‘problem’ with a strong dollar is that it can be either deflationary or it could indicate ‘risk on’. Similarly, gold can be inflationary but also act as a fear asset. That is why the key challenge of investors is to understand the broader context and intermarket dynamics. A rising or falling dollar has a meaning in the context of trends in other leading markets.
We identified back in August that the primary market trend would be ‘risk on’, and that rising yields would the primary driver. That is a key insight for investors, as it suggests that the U.S. dollar moves as a result of rising yields. Contrary to the rise of 24 months ago, the dollar was the primary market trend, indicating fear entered into the marketplace.
So today’s strong dollar is not suggesting fear, it is rather following rising yields and growing risk appetite. A rising copper price is confirming that viewpoint as well.
So, yes, it makes perfect sense for copper to enter a new bull market and gold to sell off as the dollar breaks out to multi-year highs.
The PowerShares DB US Dollar Index Bullish (NYSE:UUP) closed at $26.29 per share on Wednesday, up $0.16 (+0.61%). Year-to-date, the largest ETF tied to the U.S. Dollar has gained 2.5%.
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