The USD continues its depreciation against nearly all other currencies. However, seems like this is not one of the concerns of the US government as it keeps overnight interest rates to all time lows (see interest rates). At the same time, this decline cannot continue infinitely before problems come knocking.
Look at this from a purely economic standpoint: if the dollar continues to decline, US buying power will fall significantly. This would mean an increase in the price of all commodities that are valued based on the dollar (silver, gold, oil, natural gas... pretty anything of importance). Eventually, inflation will take over and the moderate GDP growth that we have seen will pretty much be negated.
This problem is further heightened by the fact that China holds trillions of USD in its reserves that it might decide to trade away for a stronger currency like the Euro.
Historically, China's RMB has been pegged at RMB7-8/$. Chinese government has taken a lot of pains to keep this exchange rate constant so that their exporters have an advantage when trading with the US. As China becomes more economically independent, this incentive to keep the interest rates constant is falling. If the Chinese decide to let market forces dictate exchange rates, they would trade away their dollar reserves. This will lead to further weakness in the dollar, leading to all the bad things I have just said.
On the flip side, the weaker dollar allows for more US exports which is a boon to the government as it tries to work off its enormous deficit. However, the negative effects of a very weak dollar far outweigh the positive effects of the increased exports.
Thus, for the economy to continue functioning, I strongly believe that the dollar needs to make a recovery. I am unsure as to when this could happen - Let us look at the charts.
The /DX managed to break both the 8 day and the 21 day MA today. However it wasn't able to sustain the breakout above the 21 day MA, so a turnaround based on MA's is still not confirmed. The Stochastic Oscillator is showing mixed signals as it goes back and forth in between overbought and oversold zone. We have also seen 5 waves down on this chart meaning that this downtrend is over and right now we are consolidating while we decide which way the next trend is going to go.
Unfortunately, at this time, I cannot with much conviction say where the dollar is going to go. I believe it will depend on a major event like interest rate change or other government activity.
Interest Rates
As I mentioned, interest rates are at an all time low - in fact yesterday for a short period the short-term interest rates were NEGATIVE!!! This is pretty amazing and it could mean two things:
1. Investors have such little confidence in the equity/riskier bonds market that they are actually willing to take a little LOSS in interest rates to be able to buy risk-free securities. That says a lot about the investor confidence in the equities market.
2. It also means that investing in US-backed securities is worthless to foreign investor. As an investor in China, I would much rather invest in a relatively risk-free Chinese bond and make a small return than invest in the US and have a negative to zero return. This ties in with the weakening dollar - as fewer investors come to the US, the dollar further weakens.
Once again, I strongly believe the US government is going to raise its target Fed rates to improve this situation. However, I do not know how soon this could happen - probably not until the next Fed meeting.
Commodities
Why have the commodities across the board (except Natural Gas, which I traded thinking it would go up) gone up? Is it because of the booming economy and the increased global demand? No - the simple reason of the commodity bubble (yes, I said bubble) is the falling dollar.
Gold:
A megaphone top has formed on GDX and this is coupled with a bearish reversal on the stochastic. Additionally, the 8 day MA was broken in the last two days further showing bearish signs. Coupled with the possible reversal in the dollar, this could be the turning point in GDX. However, if the dollar continues to decline, I believe at best we will see a modest correction before the gold goes right back up.
Oil:
Oil has been moving sideways for nearly a month now and no significant technical patterns or indicators have developed on the daily chart. An important point, however is that the bollinger bands are now at one of their narrowest point. Generally, if the bollinger bands narrow out that much, one can expect them to widen very soon and widen quickly. Widening would obviously be preceded by a large move in oil. As to when could this happen - watch the dollar.
When the dollar moves, so does everything else.
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