Over the past week, the U.S. dollar has squashed all rumors of its demise like a bug on the windshield of a speeding semi. Last check, the greenback stands at its highest level in nearly nine months.
As for what's causing the currency's new lease on life -- well, that depends on who you ask. In the eyes of the mainstream experts, the U.S. dollar is rallying on the wings of a hawk named the Federal Reserve. To wit: On February 18, the Fed board increased the discount rate it charges banks for emergency loans from .50% to .75% in a surprising, "off-cycle" meeting. For many, the rate hike was the "first step" in unwinding the Fed's monetary easing crusade of the past two-plus years AND thus, a solidly bullish sign for the U.S. currency market.
It only makes sense that the financial in-crowd would attribute the dollar's recent strength to the Fed's policy. After all, when the dollar was supposedly at death's door in late 2009, those same folks accused the Fed's "easy-money" policies for holding the greenback's head below water.
There's just one problem: The Fed's policies weren't the reason for the dollar's weakness, nor is the Fed's latest move a reason for its strength. To prove the first point, do you remember what the dollar did between August and December 2008? At the time, the Fed spearheaded the single-greatest inflation creating scheme in U.S. history -- including ten rate cuts in 12 months to a historic low of 0% AND $12.8 Trillion in U.S. government bailouts. Yet -- despite the "easy money spigot" open wide, all along the U.S. dollar
strengthened, from its May 2008 all-time low until its December 2008 high, as this chart shows (copied from EWI's
Mon.-Wed.-Fri. Short Term Update):
As for my second point -- that the Fed's latest interest rate hike has had nothing to do with the dollar's rally -- just look at the timing. The most recent leg of the dollar's uptrend got started long BEFORE the Fed's February 18 move: It take off to the upside on November 26, 2009. EWI's team of analysts saw it coming via these well-timed insights:
- (One day before the dollar's low) November 25 Short Term Update: "The US Dollar Index is making a 'final probe' to complete the wave structures. When viewed in the context of the daily chart, the decline from the November 3 high still looks best as a fifth wave, which is an ending wave. A rise above __ level will be the initial signal that a low is in place."
- December 4 STU: "A Bottom in the US Dollar Index. The initial leg of this turn up should be sharp, as overleveraged dollar bears are forced to cover their position."
Don't lose sight of the real story: What drives trends in the U.S. dollar are not the Fed's policies, but investors' collective hopes and fears. Elliott wave patterns in the USD charts reflect those emotions, making markets predictable. Stay ahead of the biggest turns today via a risk-free subscription to the
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