US dollar index component weights
The DXY is a weighted index comprised of six currencies, shown here:
Sanctuary Status Returns to US Dollar By Kevin Brekke
caseyresearch.com
The two-week trading period of August 29 through September 9 saw the dollar undergo a rapid rise against many of the world’s currencies. The renewed vigor in the greenback was in reaction to a flood of unsettling news: resignations at the ECB; uncertainty about Germany’s participation in European rescue operations following a ruling by the country’s high court; increased scrutiny of the solvency of EU banks; implied probability of Greek default nears 100%; rising rates on sovereign debt across Europe’s core; and simmering fears that a slowdown in world economies might lead to another global recession.
There was no shortage of bad news, with much of it emanating from Europe. No surprise then that investors returned to old habits and bought dollar-denominated assets as a perceived sanctuary. The hot money flow spiked the US Dollar Index (DXY) – the most widely monitored and often-quoted gauge of dollar strength or weakness – from 73.69 to 77.15 (a 4.7% spike) in 10 trading days.
The DXY is a weighted index comprised of six currencies, shown here:
(Click on image to enlarge)
With the euro accounting for nearly two-thirds of the Index, the DXY is basically a measure of the US dollar against greater Europe. If we ignore the yen – not hard to do with its paltry 14% slice – the Index is actually confined to the currencies of countries in a narrow strip of the northern Occidental part of the world. This biased focus limits the use of the Index as an accurate barometer of the dollar’s global standing. To remedy that, let’s take a look at the exchange rate of the dollar against a broad range of currencies during the 10-day period stated above:
(Click on image to enlarge)
The chart displays currencies from the Americas, Asia-Pacific, Scandinavia, East-Southeast Europe, Middle East, and Africa. The recently widened trading band of the “managed floating exchange rate” of the yuan acted to accelerate its appreciation. Ongoing civil protests against despot governments throughout the Middle East seems to have caused a flow of money into the riyal and dirham, which are seen as safer havens within the region.
Yet, with a few exceptions, the dollar was higher against currencies spanning the globe. And the strength was more than a knee-jerk response to current events.
For each currency in the chart there are two columns: The left column shows the 10-day percentage rise, and the right column shows the rise since the DXY hit a 38-month low on May 2, 2011. So although the recent spike in the index accounts for a good part of the move, the dollar has been in a sustained, four-month rising trend.
For gold investors like us, a rising-dollar trend is something that gets our attention. Historically, gold and the dollar tend to exhibit a negative correlation, generally moving in opposite directions. And that had been the case until recently, as we can see here:
(Click on image to enlarge)
The left and right vertical axes are labeled in nominal values. However, from bottom to top, both scales represent a nearly identical percentage progression – similar moves in either series are of equal percentage. Also, the DXY scale was adjusted so that the two series crossed at a critical point.
We can see that a negative correlation between gold and the dollar was in place since March, exhibiting a near mirror image of each other. But the mirror was decisively smashed in late July, with gold putting in an impressive upward move. This was followed shortly thereafter by a thrust higher in the dollar, taking it above some near-term resistance levels.
The question now is: Can both of these moves hold? If the dollar holds at its current level and establishes a base, it is possible that we may be in for a multimonth period of dollar strength that could take the index back above the 80 level.
How might gold answer? With gold entering a seasonally strong period, the competition for haven status against a stronger dollar could dampen its seasonal upward tendency. On the other hand, days where gold has sold off have been on heavy volume, signaling that some speculators are using gold’s strength as profit opportunities.
Whatever happens next, any strength in the dollar will be temporary. The runaway debt, deficits, and uncontrolled spending and borrowing of the US government have doomed the dollar to eventual destruction. View the dollar’s strength as an opportunity to move US assets offshore. |
