Is U.S. Dollar Weakness on the Way?
The banks, insurance companies and other financial institutions created a lot of “money” with a variety of new financial instruments and lending practices since 2000, and the U.S. and other governments are now trying to cover those commitments with massive amounts of more new money to pay for various economic stimulus and bailout programs.
Without getting into the politics of these developments and whether they will succeed, there is still a strong debate about whether the ultimate end result will be high inflation as the United States attempts to inflate its way out of the debt mess or a deflationary collapse as the debt/credit situation implodes.
Traders can only try to detect what might happen by keeping an eye on VantagePoint charts. It’s obviously too soon to come to any definitive conclusion, but the charts may be offering some early hints that the inflationary scenario will unfold. In this environment, intermarket relationships will become more noticeable and more important than ever.
It’s hard to say which VantagePoint chart we should look at first for clues, but we’ll start with interest rates. The six-month VantagePoint chart below of the iShares TR Lehman 20+ T-bond exchange-traded fund (TLT), which looks a lot like the chart for T-bond futures, has been heading lower since the predicted medium-term moving average (blue line) crossed below the actual medium-term moving average (black line) in early April. The breakout to the lowest level in six months (red dashed line) suggests a trend to higher interest rates . . . and potentially higher inflation rates.
Source: VantagePoint Intermarket Analysis Software
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The weakness in bonds and bond futures is also reflected on the U.S. Dollar Index chart below, which broke to its lowest level since early January in dropping below 83 last Friday (red dashed line). Whether the USDX will follow through on a downside move is still unknown. Markets tend to test breakouts of support or resistance such as this and seldom make extended one-way moves, but it could be the beginning of dollar weakness that some expect to be inevitable in an inflation setting. 
Source: VantagePoint Intermarket Analysis Software
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What the dollar does has a significant effect on the foreign exchange market. While the dollar has broken through its March lows, euro futures have not broken above their March high. A break above about $1.3750 (red dashed line) would indicate further dollar weakness, but Europe, like the United States, is still dealing with its own financial issues that may keep pressure on the euro.
Source: VantagePoint Intermarket Analysis Software
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But beyond its obvious intermarket influence on other currencies, dollar weakness has bullish implications for a number of markets if higher inflation is on the way. Every commodity has its own fundamentals that affect prices, but the value of the U.S. dollar is a key “outside market” hovering above prices of global markets priced in dollars.
One of the main examples is crude oil. In the last week crude oil futures prices have broken above their previous high (red dashed line). Certainly, the cutback in production as oil prices slumped below $40 a barrel is a factor on the supply side and the anticipation of economic recovery is a factor on the demand side. But could energy traders be preparing for the prospect of higher inflation and its effect on commodity prices?
Gold hasn’t given any such indication yet, as one might expect in inflationary times, but a few markets such as soybeans or silver or copper have. Now, it’s a matter of waiting for the charts to reveal how these intermarket relationships will play out.
Source: VantagePoint Intermarket Analysis Software
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