Not only technically but fundamentally as well things are in place to support the index from falling further significantly. By composition dollar index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc and thus the movement of the index is linked to the economic activities happening in the respective countries.
Euro, Japan, and UK continue to provide easy monetary policy while the era of loose monetary policy will slowly fade away for United States going forward as they strive to resolve the huge pile of debt they have acquired in past 4 years. Also the US economy is in much better shape in terms of employment and GDP growth than it was couple of years back which will naturally support their currency.
So overall outlook seems good for USD with one caveat that if Congress and democrats couldn't reach an amicable deal to provide a road map for gradual debt reduction and automatic spending cut becomes effective from 1st March 2013, there could be a significant sell off in US equities and dollar index. But the probability for this seems quite low as the stakes involved are way to high. On the other hand if a deal is reached and we get a proper sensible debt reduction plan then there could be a 5 - 10 percent rally in dollar index and S&P 500 from current levels.
Your view on this topic in comments below will be highly appreciated.
Very well written and explained... Dollar had a base of 100 when the dollar index was created in 1973 and since then it had lost 20%. Further fall against the currencies on the other side of the equation seems unlikely...
ReplyDeleteI have been watching dollar index since you recommended it at a 79.8, it went a little down to 79.5 and then bounced back to 81.2 levels thereby making INR weaker against USD as explained above.
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As explained in the post titled USD INR Outlook 2013 , INR was looking overbought given the economic setup then and was about to reverse the move from 53 levels.
ReplyDeleteINR today hit 54.40 partly due to dollar index appreciation and partly due to India's own CAD and trade deficit situation. It must be noted that more than 2% of correction has happened in INR inspite of more than $7 billion of FII inflow which is very disturbing.
There is a major risk of INR going back to 57 levels in couple of months in case foreign funds dry up and there is further slow down is western world triggering a slow down in export.