The Dollar Index is a Mirage

The dollar index measures the U.S. currency’s value against a basket of other reserve currencies. While the index has the most significant exposure to the euro at 57.6%, it also has exposure to the Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. The U.S. dollar and dollar index components are fiat currencies that derive value from the full faith and credit of the countries that issue the legal tender.

The geopolitical shift, marked by the 'no-limits' alliance between China and Russia in early 2022, has significant implications for global trade. The conflict in Ukraine and subsequent sanctions on Russia have spurred a move towards de-dollarization, with BRICS and other nations opting for Chinese yuan or other forms of exchange. This shift is further underscored by the surge in gold prices, as central banks, governments, and monetary authorities increase their gold reserves, favoring the precious metal over the dollar and other reserve currencies. 

While the dollar index has risen from the July 2023 low below the 100 level, the rise could be a mirage as all fiat currencies are losing value.

U.S. inflation remains a nagging issue

• Over the past months, CPI, PPI, and PCE data indicate that inflation remains stubbornly above the Fed’s 2% target.
• The leading commodities, gold, oil, and copper, have experienced rallies, indicating inflationary pressures.
• Cattle and cocoa prices have risen to record highs, coffee prices are rallying, and many other commodity prices remain elevated, contributing to higher prices.
  

Gold prices have moved to new record highs

• While the U.S. dollar has been the world’s reserve currency for decades, gold has the longest history as a means of exchange.
• Central banks have been buying gold, adding to reserves, and validating gold’s role as a reserve currency in the global financial system.
• Gold’s bull market began in 1999 at the $252.50 per ounce bottom. Its quarter-century bullish trend shows no sign of running out of upside steam.
• Gold is the ultimate inflation barometer.

China’s economic and military ascent weighs on the dollar’s value as the leading reserve currency

• China is the world’s second-leading economy with increasing worldwide economic interests.
• China declared its intention to reunify with Taiwan, increasing tensions between Beijing and Washington.
• China has purchased crude oil from Middle Eastern OPEC members in Chinese yuan.
• China is leading an effort to introduce a BRICS currency to challenge the dollar’s role as the reserve currency. The BRICS currency could have gold backing, as China has been the most high-profile gold buyer.

The era of low interest rates could be over

• The Fed Funds Rate remains stuck at the 5.25% to 5.50% level, with inflationary data pushing the potential for a rate cut further into the future.
• The Fed has continued quantitative tightening and reducing its balance sheet, pushing rates higher further out on the yield curve.
• JP Morgan’s Jamie Dimon recently warned that interest rates could rise to 8% “or even more.”

Technical levels to watch in the dollar index- They may not reflect the international landscape

• Technical support for the dollar index stands at the July 2023 99.22 low and the February 2018 88.15 low.
• Technical resistance for the dollar index is at the October 2023 107.05 high and the September 2022 114.745 high.
• At around the 105.50 level in late April 2024, the index is just below the first resistance level and above the midpoint of the 2018 low and 2022 high.
• The index is in a mostly bullish trend, but that path of least resistance could be meaningless if the dollar’s global dominance continues to decline.

Markets reflect the economic and geopolitical landscapes. Wars in Ukraine and the Middle East, tensions between the U.S./Western Europe and China/Russia, and the increasing trend of de-dollarization in international trade have diminished the U.S. currency’s dominant position. The dollar index may measure the U.S. foreign exchange against other reserve currencies. Still, its role in the global financial system may decline, making the dollar index a mirage.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!