U.S. Dollar Bull And Bear Markets

The idea of endlessly repeated cycles is a very old one. This is how the ancients perceived time: not as linear sequence of events, but as replaying patterns of dark and golden ages. Although the Judeo-Christian culture changed the way we view time, we like to see the market as an area of constant struggle between bulls and bears, and the resulting upward and downward trends.

Since the end of the Bretton Woods system back in the early 1970s, the U.S. dollar has also moved in trends and cycles. Due to data availability, the chart below shows the trade weighted index of the greenback against the currencies of America’s major trading partners from 1973 until January 2018, with bull and bear markets marked with green and red arrows.

Chart 1: Bull and bear markets in the U.S. dollar (Trade Weighted Index against major U.S. trading partners) from 1973 to January 2018.

Observing closely, we can distinguish three bull markets and three bear markets (assuming that we are still in the bull market). When President Nixon closed the gold window in 1971, the U.S. dollar entered a bear market which lasted until 1978. Then, the bull market started, as Paul Volcker, a Fed Chair at the time, was squeezing inflation. The Plaza Accord, which was an international agreement to depreciate the U.S. dollar, ended the rally in that currency. It halted in 1995, as the funds flew more intensely to the U.S. stock market to participate in the tech boom. The appreciation endured until early 2002, a short period after the 9/11 terrorist attacks and the implosion of the dot-com bubble. The following bear market persisted until 2011, when the U.S. economy roughly recovered after the Great Recession. Then, the most recent bull market set forth. Depending on the perspective, it either terminated in 2016, or it still lasts, and we experience only a correction on the way.

Let’s analyze the statistical properties of the past cycles, which are presented in the table below, to predict the future U.S. dollar’s moves (as of mid-January 2018).