The Declining Dollar

It has been my view expressed in these alerts and elsewhere over the past several months that there will be a currency crisis this summer caused by a plummeting US dollar. Summer of course began a few days ago, so it is reasonable to ask whether my view has changed. It hasn't.

The US dollar is now standing on the edge of the precipice. In fact, it is already peering over the edge as we can see in the following chart of the US Dollar Index.

There are several important observations to make from this chart. First, the dollar is in a major bear market. It peaked at 120.97 on July 5, 2001 and has been declining ever since within the major downtrend channel delineated by the red parallel lines.

Trends do not change unless there is some solid fundamental reason for them to change. There is only one way to strengthen a currency - raise interest rates. The Federal Reserve again failed at its FOMC meeting this past week to raise rates. So the only logical and prudent assumption is that the downtrend in the dollar will continue.

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