Sign inmarkettech's Commentaries
A Message from Louis B. Mendelsohn - President and CEO of Market Technologies
It’s more than just the dollar
The U.S. Dollar Index (USDX) has cracked through a key support area at 78.00, indicating that the weaker dollar/higher inflation scenario that some analysts have been forecasting is starting to gain traction. It’s too early to say for sure, but that is one market possibility now.
USDX futures peaked just below 90.00 last November and again in March and have been in a steady decline since March. If the dollar’s value continues to erode, the next tests of support would be around 76.00, the low last September, and then the major lows in the 71.00-72.00 area in the spring of 2008. If the downtrend carries down to the latter lows, it will probably set off a market battle that is likely to have global political and monetary ramifications.
But it isn’t just the U.S. dollar or the other major currencies that trade against the dollar that have a big stake in the outcome of the dollar’s struggle, the entire global economy will be affected as a result of movements in the commodities markets. This demonstrates why intermarket analysis should be a key ingredient in any trader’s decision-making process.
Commodities which are priced in dollars – which is to say virtually all major commodities – are highly influenced by the changing value of the U.S. dollar, and generally trade in the opposite direction of the dollar. That is, if the value of the dollar declines, that is a big contributor to rising prices for crude oil, soybeans and many other commodities and would feed into a commodity price boom that some analysts anticipate. On the other hand, if the dollar regains its footing and gets stronger, it would put pressure on the prices of commodities and fit the outlook of analysts who expect economic and seasonal weakness for commodities.
Using intermarket analysis from another perspective, if commodity prices are rising, then you should expect a weaker dollar, and if commodity prices start to slide again, expect a stronger dollar. Both commodities and the overall stock market seem to be riding together in the same direction recently, so, like commodities, you ought to include various stocks or stock indices as an intermarket indicator of price movements in the dollar.
Best Wishes,
Lou Mendelsohn
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currency
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