The U.S. dollar has become the world’s largest fiat currency experiment ever. Not only is it the world’s reserve currency, but numerous other nations have either adopted it as their own, used it to peg their own currency, or widely accept it to settle transactions.
Interest rates, precious metals, agricultural products, and energy are all priced in dollars.
Famously, the U.S. government pledged its support to the Saudi royal family – so long as the House of Saud accepted oil payments in “petrodollars” only.
But I’m seeing evidence that throws the dollar’s long-term health and survival into doubt. I don’t think it’s going to disappear tomorrow, of course, but its dominance is likely on the wane.
That’s bad news for investors who aren’t ready to move with the big changes, but it could be one of the biggest opportunities of this century…
Closing In on a Secular Peak
The technicals are my favorite way of determining whether the dollar is relatively over or undervalued.
These long-term technicals tell a really interesting story…
You see, in 2014 the U.S. Dollar Index (DXY) began a market-shaking run higher, gaining 25% in less than nine short months. That’s like sprinting at top speed… for five miles – especially when you’re the world’s reserve currency.
Anticipating the end of rapid expansion in the Fed’s balance sheet likely spurred the dollar higher.
And yet, even that hefty gain in the DXY is hardly a blip compared to the cyclical run-ups we’ve seen previously, for instance in the early 1980s, and again in the early 2000s.
Now, since 1985 there’s been a long-term declining trend in the DXY.
In the last 40 years, it has had two secular peaks, which really jump out on the graph here. The first was in 1985 near the 160 level, then it peaked again in 2002 at the 120 level. It’s difficult to say with certainty, but the strength we experienced in the past two years may well have run its course, forming the latest peak.
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