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The Dollar Is In Real Trouble Here

The rally in gold, the strength in Treasuries and the glut of liquidity already in the market point to a sharp move lower for the dollar.

Ever since the March low, things have been bad for the U.S. dollar. There's evidence that it could be about to get worse.

The dollar, once the currency standard for the world, looks like it's losing its luster. The coronavirus has thrown the world economy into disarray, but it's events since then that have been particularly bearish for the dollar.

The dollar index peaked at around 103 back in March of this year. Since then, it's been mostly downhill.


Since remaining range-bound for much of April into May, the dollar has made two significant moves lower, the latter which has been an impressively steady descent that brings it to a key level.

I've often pointed to the 96 level on the dollar index as incredibly key. With the exception of March 9th, the dollar was able to bounce off of that level and move higher. It did it again during the first half of June.

This past week, it hit the 96 mark again, but the follow through was different. Instead of bouncing once more, it pushed right through it and made a quick descent to 95. In other words, all bets may now be off and we could be look at a move to the low-90s, if not 90 outright.

Reasons Why The Dollar Will Move Lower

There are a number of market tells right now that suggest a further decline in the dollar could be coming...

  1. The rally in gold and silver - The dollar is strong when the economy is strong. The economy is not strong right now. Investors move into defensive assets, including precious metals, when they're worried that the economy and the markets are about to get worse. The move higher in gold and silver suggests that investors are taking risk off the table.
  2. The glut of liquidity already in place in the markets - The Fed has flooded the economy with a mountain of cheap dollars and record low interest rates that makes borrowing easy. We know that it's working because retail sales have rebounded and the housing market is robust. But an oversupply of dollars means their value will likely decrease. I'd argue it should have happened a while ago, but it's starting to happen nonetheless.
  3. Strength in Treasuries - Stocks and Treasuries generally move in opposite directions. Despite the strong stock rally off the March bottom, Treasuries have stubbornly retained their value. The bond market tends to more accurately reflect the state of the economy. When Treasuries remain unusually strong in the face of a risk-on market, it's usually a sign of trouble ahead.
  4. The U.S. is behind in the COVID recovery - All politics aside, the U.S. COVID outbreak continues to get worse, while much of the world has the virus contained. That lessens the desirability of the dollar as the world's safe haven asset. Quite simply, the world is better positioned to come out of the COVID outbreak faster and better positioned for an economic rebound. That increases the demand for currencies like the yen and the euro over the dollar.

I think a move to the lower 90s on the dollar index is pretty likely at this point and I wouldn't be at all surprised if it broke through the 90 level before the end of the year.

Most economic signals are supporting further weakness in the dollar and the health environment positions the dollar as one of the weaker global currencies as we head through the 2nd half of 2020.

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