Type “U.S. dollar” in Google News and you'll get a dozen fresh links to articles on the latest in the forex markets, complete with speculation about the dollar’s future. Here's just some of what they discuss today:
- The Federal Reserve future monetary policy
- Prices of gold and silver
- Sovereign debt problems in Europe
- Geopolitical risks in Africa and the Middle East
- Concerns that Japan’s economic crisis will impact the U.S. economy
- Reports of higher U.S. retail sales, higher jobless claims, flat PPI, etc.
- Speculation for even higher interest rates/borrowing costs in the Eurozone
Ask any ten mainstream forex experts how these factors will impact the dollar and you'll probably get ten different answers. See, when it comes to "market fundamentals," how you interpret the data is really your choice. For example:
- If the Fed continues its "accommodating" monetary policy, you could say it's good for the U.S. economy and therefore the dollar -- or -- you could say that the Fed's policy is inflationary and therefore bad for the USD.
- If gold and silver rally, you could say it's good for the dollar because the market is looking for a "safe haven," and the dollar has always been one -- or -- you could say that rising gold means investors are losing faith in paper money, and therefore the dollar is toast.
- If Europe's sovereign debt crisis continues, you could say it's bad for the euro and good for the dollar -- or -- you could say that Europe's crisis remains contained while the U.S. is facing an even bigger debt crisis of its own -- therefore, the euro wins, dollar loses.
See how easy it is? Pick a "fundamental" -- any "fundamental" -- and depending on whether you feel bullish or bearish, you can interpret it to agree with your bias. Most experts on financial TV and other media do it all day long. The question is, at the end of the day, do you really know which way the dollar goes next?
There is an alternative: technical analysis, like the Elliott wave method. You study forex charts, look for patterns and, based on where price is in the wave pattern, make a probabilistic forecast about the next move.
Just take a look at this week's chart of the EURUSD, the U.S. Dollar Index's biggest component and the most actively-traded forex pair. You'll see that, while "fundamental" experts argue about the impact of this or that macro factor, the EURUSD had been moving sideways (price action circled in red):
This week, all we've seen are big, 100-pip swings up and down -- but zero net progress. To an Elliottician, it means that prices are in a correction: the period when the market takes a "rest," or "hesitates," before the next move.