It’s well known that the U.S. dollar plays a unique role in the global economy. As the world’s de-facto reserve currency, it’s always in high demand — especially in times of stress. That makes it, along with ultra-safe U.S. Treasury bonds, the “safe haven” assets investors flock to when fear and uncertainty rises.
And since most of the world’s tradable commodities are denominated in dollars, its undulations effects the prices of things like gold, crude oil, copper, and other metals. The strength and weakness of the dollar also pushes and pulls foreign stocks — since hair-trigger hedge fund types always want to be positioned in assets denominated in rising currencies.
So it’s no surprise that as the dollar rose in November — on Irish bailout concerns — it slammed the brakes on the performance of the commodities complex, emerging market stocks, and gold. But now, with animal spirits returning, the dollar is on the slide again. And that’s just the thing to keep the rally in risky assets running. Here’s why.
As you can see in the chart above, the dollar has been in a steady downtrend since peaking during the European sovereign debt crisis back in June. Last week, the dollar bonked its head on downtrend resistance and has been sliding ever since. The negative reading in the ADX indicator confirms a new downtrend is being established — as it did back in July and September.
It’s also worth mentioning that it’s not only the dollar that’s being shunned. The same can be said for U.S. Treasury bonds, which were hit hard on Tuesday in the wake of a poor auction of five-year notes. Demand for the auction dropped to just $91.4 billion — the least since July 2009.
With safe havens performing so poorly, we can only assume it’s because professional traders are seeking out higher returns in riskier assets like equities and industrial commodities.
No surprise then that so-called “contra-dollar” assets are perking up. Copper is pushing to new highs. Crude oil has returned to levels not seen since before the May 6 “flash crash” event. Industrial metals have returned to mid-2008 levels. And emerging market stocks have broken up and out of a two-month bull flag pattern.
Of course, we can’t forget precious metals. Another consequence of the dollar’s signs of weakness has been a big spurt in precious metals and gold/silver miners. For the week, gold is up 2.3%, silver is up 4.5%, the Market Vectors Gold Miners (NYSE: GDX) is up 2%, and the Global X Silver Miners ETF (NYSE: SIL) is up an impressive 5.1%. As you can see in the chart above, the last time the U.S. dollar rounded lower out of a consolidation range ignited a huge rally in the precious metals. Something similar could be in store again this time.
For more on the dollar, be sure to check out my November column on the subject here.
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The author can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
