Is This The End For The Strong U.S. Dollar?

Is This The End For The Strong U.S. Dollar?As I write this edition of the Daily Pfennig® newsletter, I am flying from San Diego to Chicago. The four-hour trip spends most of its time over The Great Plains and The Rockies where straight lines stretch out for miles unbroken in the emptier sections. Today, of particular notice, was a highway. The straight lines divert in places around lakes or mountains or to avoid property lines back when the highways were built.

I am not a financial markets chartist and I don’t rely on charts to forecast future values of assets, particularly in the short term. But, more in a Newtonian sense, I do observe that, much like those highways, many asset classes move in long trends until acted on by an outside influence. Currency prices in particular are influenced by macro-economic and corporate fulfillment transactions that do not change course quickly.

But, change they do and perhaps now, the U.S. dollar’s strength is about to come up against a cranky landowner and will be forced to alter course.

Since 2011, the U.S. dollar has been king-of-the-hill. Virtually every financial news outlet has covered the story, often noting that it has placed U.S. exporters at a disadvantage in the global marketplace. Last year was particularly tough.

Fig. #1
World Currencies vs. The U.S. Dollar In 2015

Source: The Non-Dollar Report. Chart used with permission. The trend data presented does not include interest nor retail exchange spreads or other transaction costs.

Back in January, this sentiment continued, as evidenced by stories such as one on January 20, 2016, in The New York Times titled, “How to Make Sense of the Plummeting Global Markets.”1 Stocks, bonds, oil and other commodities had fallen rapidly since the beginning of the year causing consternation and turmoil. The Royal Bank of Scotland countered with a recommendation to “sell everything!

Fast Forward To April
Global markets are mostly settled, commodity prices may be inching upwards, and Federal Open Market Committee (FOMC) members are making more positive speeches. Life may be good.

But, on the entertainment financial news channels, we still hear stories about the strong U.S. dollar. A quick look at the numbers shows why this is interesting.

Fig. #2
World Currencies vs. The U.S. Dollar In 2016 YTD

Source: Bloomberg. Chart: EverBank Research Team. The trend data presented does not include interest nor retail exchange spreads or other transaction costs.

As you can see, many if not most of the currencies that people invest in through EverBank have had significant gains in the past three-and-a-half months. Has the trend changed? Will the U.S. dollar decline from here? Of course, we can’t know for sure, but it seems like the turn has occurred.

Let’s take a look at how currencies tend to behave in the long run. Here, we’ll look at the Swiss franc. I’ve chosen the franc because it has been considered a global currency indicator for a long time, and because events like the formation of the euro did not affect it directly.

As we have written about in the Daily Pfennig® newsletter many times, it is our belief that currencies move in long trends. Within the trend, there is often volatility – like that road diverting up through the high country. These diversions often come with a new government policy – for example, the high U.S. rates in the early 1980s, or the 2002 U.S. Federal Budget proposal with a large fiscal deficit imbedded. It might be a change in business practice, or even just a change in investor sentiment.

Remember, Swiss franc prices are quoted as Swiss francs/U.S. dollar, so that a holder of the currency benefits as the price declines.

Fig. #3
Swiss Franc vs. U.S. Dollar ? 07/1980 – 04/2016

Source: Bloomberg. Chart: EverBank Research Team. Returns shown for US investor holding Swiss Franc. The trend data presented does not include interest nor retail exchange spreads or other transaction costs.

Since 1980, I count four U.S. dollar trends:

  1. Up until 1985, as the U.S. held interest rates very high to combat the stagflation of the 1970s.
  2. After the Plaza Accord of 1985 and until the Clinton-Gingrich fiscal reforms began to take shape in the mid-1990s. As the U.S. headed towards a reported budget surplus and the tech bubble was drawing money in from all over the world.
  3. From the point when the large tax cuts in 2002 combined with a war effort threw the sea anchor out on the U.S. dollar, until the crisis hit in 2008. Up past the financial crisis, the U.S. dollar declined substantially.
  4. From 2011 until early 2016. It isn’t for sure that the trend has changed, but it looks and feels that way.

The way I see it, the U.S. dollar may have entered into another downward trend. If that is something you believe, too, then investing in currencies and maybe in gold or silver could be a way to profit. Learn more about the foreign currency and non-FDIC insured metals accounts2 we offer at EverBank to determine if they could benefit you.

Until the next Daily Pfennig® edition…

Onward and upward.

Frank Trotter
EVP & Chairman
EverBank Global Markets Group