Summary
The US Dollar is turning up from multi-decade lows and is on Neutral since July 27,07 but is probably headed for a late 2007 low.
Since 2001 the USD is mirroring the 80's decline, and election optimisim may turn the USD around near the early 2008 cycle low.
The recent rise in US Rates is supportive of the dollar, and is happening near a 7 year cycle in the Rates vs Gold (Inflation)
chart and warning that the USD could take a pause in its decline for a year or two as the world watches the new administration.
The US Dollar is declining due to Debt inflation of 8%
Since the 1970's the amount of US Debt backed by the dollar has increased at a rate of 8% per year, while the dollar has declined
at a rate of 2% per annum. Half of this debt is owned by the Fed and US itself for its pension liabilities, the remaining half
is owned about equally by Americans and Foreigners. There are now over 4 trillion in global USD reserves and more than two thirds
are in Asia. When these reserves start to flow into other assets like resources, they will cause price increases where they flow,
and downward pressure on the USD and its debt. The Currencies of countries with a major surplus like China, Japan, Germany and Russia
will appreciate over time, especially the ones with large USD reserves like Asia and Russia.
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Rates and Inflation can also affect the US Dollar
Higher Rates in major economies support their Currencies by attracting Capital with their low Bond price and high Rates of return.
We can see in the relative strength of major Currencies below that higher Policy Rates tend to strengthen the Currency, but this has
not and is not likely to work for the US because of the rate of issuance of Debt. Dollars and Bonds are not a good place to be when
Inflation rises, and Gold or Oil are good measuring sticks of the Rate of Inflation. By charting Rates vs Gold for Inflation below
we can get a good idea of the positive vs negative influences on the USD. We can see that Rates and Inflation do affect the USD but
are not the only factor, and by this Ratio the USD is about where we would expect it to be.
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Japan's low rate policy has made the Yen the weakest major Currency of the last decade
This July the Bank of Japan raised Rates for the first time in 6 years and may have signaled the end of the Yen's weakness for a
while. Each wave down in 1998, 2002 and 2005 has been on lower momentum while the waves up to 100 have been stronger possibly
forming a bullish ascending triangle targeting the highs near 120 or higher. However the Yen has made 2 false starts and must now
rise quickly or a face a seriously bearish break of the 25 year uptrend line near 80.
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The US policy has made the Canadian dollar the strongest major Currency of the decade
The Inflation caused by the large issuance of US Treasuries and dollars has led to a boom in Commodities related Currencies like
the Canadian and Australian dollars. Also, since 2001 the US relations with Arab countries are difficult, and it is logical for
them to move their funds to more comfortable countries like Canada, Britain and European countries. Canada has been the biggest
winner because of it proximity and similarity with the US, as well as its Oil and Mining businesses. By looking at the last 150 years
we can see the Canadian dollar doubling vs the Pound since the turn of the Century until the mid 70's, but giving back 25% to the
Pound until 1998 and losing 40% to the USD until 2001. Since then the Canadian dollar has regained almost all its losses against
both Currencies. Until the boom in Commodities shows serious signs of trouble, and the US relations with Arab countries improve,
the Canadian dollar is unlikely to see much weakness.
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Charts courtesy of StockCharts.com