Since May 17, 2013, the U.S. dollar index has made several rallies above its July 24, 2012 two-year peak of 84.100 and has failed each time to remain above that key level. So far the media has completely missed mentioning this rally failure. We anticipate that these failed rallies will be followed by a notable decline for the US dollar, possibly to its lowest point since the final months of 2011.
The million dollar question is: will central banks, who usually try to fight inflation, be frustrated in their attempt to reignite it, even as they are more coordinated than ever in their efforts for expansionary policy (quantitative easing). The interesting issue of other countries joining the devaluation game is that by attempting to push their currencies lower, the U.S. dollar has moved higher. However it won’t last very long in the mid-term horizon.
For those investors who are puzzled that inflation hasn’t begun to resurface in one way or another, rest assured that it will sooner than later. This occurrence will be the biggest surprise to the nouveau bulls and investors that are lined up to benefit from deflation, in yield driven securities.
A strong dollar is currently the popular forecast of analysts and investors. The dollar index will likely complete a bottom or double bottom somewhere in the range of 76 to 74 dollar, during the next nine months. However, the US dollar is in a long term bull market. The financial markets have always been about the few benefiting at the expense of the many. Therefore the popular trade of being long US dollar will not benefit the mass. Once these new-dollar bulls are flushed out of their positions via panic, leverage or stop loss orders, the US dollar index will resume its long term climb to levels far above their present one.
The weaker U.S. currency and decline in the price of long-dated U.S. Treasuries (TLT) are both leading indicators that we will experience a global inflation, or shall we say reflation.