The Return of the Almighty Dollar

When the housing crisis morphed into the credit crises in 2008, many of my fellow Americans—and the world—lamented about the decline of the United States as a world power. Flash forward six years later and the script has flipped. The good ol’ U.S. of A is once again viewed as a paragon of economic strength as emerging markets have struggled (think Russia, Brazil and China) and political crises in Eastern Europe, the Middle East and Africa have reignited talk of “flight to quality.”

Yet all the big talk has failed to generate America buying in the first quarter. Although the U.S. stock market has climbed above all-time highs, the market hasn’t maintained last year’s pace.

The dollar has fared worse as the U.S. Dollar Index has lost almost one percent in the first quarter, all despite the Fed’s ongoing tapering program and hints at rising interest rates as early as next year.

From a technical perspective the dollar index has built a strong, multi-year base below 80. Since November 2010 when the index hit 78, the U.S. dollar index has tested the 78-79 range at least six times and failed to break through (see the red line below).

The U.S. Dollar Index Weekly Front-Month Chart

The U.S. Dollar Index Weekly Front-Month Chart

Long term, buying the dollar index looks like a low-risk, high reward trade with a stop below the trendline—should the U.S. economy continue to chug along. After the latest fed press conference a few weeks ago, the dollar index shot up above 80 after bottoming around 79.3 on March 10. Now maybe as good a time as any to jump in on the long side.

Although the dollar index looks attractive, maintain flexibility. If things change unexpectedly, a break below 79 represents an excellent short opportunity.

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