U.S. Dollar & Trade Deficit: Enemies or Friends? Let's Call The Whole Thing Off

Home > Currencies
U.S. Dollar & Trade Deficit: Enemies or Friends? Let's Call The Whole Thing Off
EWI has stayed one step ahead of the dollar's biggest turns

By Nico Isaac
Mon, 16 Aug 2010 16:45:00 ET

Get investable insights sent to your inbox at least once a week – for free. Challenge the way you think about investing with The EWI Independent.

Privacy

In the world of mainstream economic wisdom, the "laws" of fundamental market analysis are far less "writ-in-stone" than they are "writ" in non-hardening modeling clay; they shape AND reshape themselves to fit the news of the hour, taking on completely different forms than the ones that came before.

Take for instance the recent "re-sculpting" of this familiar mainstream "mould" -- A rising U.S. trade deficit causes a drop in the value of the U.S. dollar, and vice-a-versa.

See, back in early 2008 and late 2009, the notion of an inverse relationship between the deficit and the dollar was alive and well. It's no coincidence that those two periods also saw the greenback locked in a 20%-plus downtrend to abysmal new lows alongside widespread calls for replacing the dollar as the world's reserve currency. Here, the following news items from the time draw a clear picture:

“If something is unsustainable, it’s going to have consequences: so far the consequences [of the record-high deficit] have been a general decline in the dollar.” (March 2008 Bloomberg)
“It will take years for the greenback to recover its value and prestige. You have the U.S. still holding this trade deficit. So, it’s a very dark outlook for the dollar.” (April 2008 St. Louis Post-Dispatch)
"Soaring Deficit: The Dollar's Death Knell" (November 2009 Associated Press)

Flash ahead to today and the old dollar-deficit form is completely unrecognizable. To wit: The August 11 Commerce Department report revealed a $7.9 billion increase in the U.S. Trade Deficit for June. This was the biggest rise since record keeping began in 1992 and brought the overall trade gap to a 22-month high.

YET -- when the "nightmarish" deficit figure went public, the U.S. dollar actually rose alongside this new "explanation":

"The negative data keeps investors cautious and as a result increases risk-aversion of the market. This boosts the dollar, which is considered a safe investment. As long as the US economy continues to provide negative signals, the dollar may rise further." (AP)

(Objective Analysis Of The Dollar: The latest Financial Forecast Service reveals the near-, and long-term trend underway in the world's reserve currency. Get the complete story today.)

While fundamental analysis fits the news to suit price action -- Elliott wave analysis does just the opposite: It defines price action first, and the news follows. Case in point: Over the last year, EWI's leading analysts have remained one step ahead of the dollar's biggest turns -- as the following archive of our publications makes clear:

2009: (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."

2010: On the very day of the currency's low: June 7-9 Short Term Update:

"As we said Monday with respect to the US Dollar Index: "We will afford the upside every opportunity to complete the final subdivisions of wave 5. A decline beneath today's intraday low would all but ensure that a dollar top is in place already and that prices were starting a multi-week to multi-month decline to correct the advance from the November 2009 low of 74. 17."

Find out what's next for the world's leading markets. Get the full story today, absolutely risk-free.

Tags: U.S. dollar, U.S. dollar, cash, deficit

May 13-16

Las Vegas Money Show

July 10-13

Freedom Fest Conference

Tap Into Forex Opportunities

EWI's Currency Specialty Service delivers 24-hour-a-day coverage of the world's most traded currency pairs so you'll know every Elliott wave implication of every market move. Subscribe now and get instant access to actionable forecasts for:

EUR/USD USD/JPY
GBP/USD
USD Index

USD/CHF USD/CAD
AUD/USD
EUR/GBP

EUR/JPY
EUR/CAD
GBP/JPY
AUD/JPY

Discover what a team of Elliott wave experts can do for your forex trading>>

Free 14-page eBook

Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success

EWI's Senior Currency Strategist Jim Martens pulls from 25+ years of experience using Elliott wave analysis to show how you can put the power of the Wave Principle to work in your forex trading.
Download Trading Forex free.

*Currencies

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.