It's the comeback story seen the world over, and no, I'm not talking about the New Orleans Saints winning the Super Bowl. I'm talking about the long-time currency underdog -- the U.S. dollar -- overcoming the mainstream odds to pull off a surprising rally to seven-month highs.
Check it: From March to November, the U.S. dollar had plunged 20%, its steepest eight-month selloff in 23 years, and stood at a near two-year low against the euro. And, according to the media rumor mill, several monetary leaders from Shanghai to Saudi Arabia were seriously discussing replacing dollar-denominated oil trades with a new, super reserve currency.
Here, the following news items from late 2009 capture the funereal feelings surrounding the buck:
- "The Demise Of The Dollar" (The Independent)
- "The growing international chorus wants the dollar replaced... a move that would end the greenback's six-decades of global dominance." (Washington Post)
- "No End In Sight to Greenback's Misery. History tells us that the dollar shouldn't start rising until 12 months after the Fed starts to lift rates." (Bloomberg)
Yet -- a near-term "end" to the dollar's death rattle was exactly what came next -- and without any changes in Fed's monetary policy. On November 26, the greenback came to life in a powerful uptrend that erased the entire previous six-months of decline in just one month.
It's no secret how unprepared the mainstream community was for the dollar's comeback. November 2009 saw bullish dollar sentiment plummet to just 3%, an all-time record low. Still, while the masses were fitting the currency for a coffin, Elliott Wave International's team of analysts foresaw a powerful rebirth in dollar strength 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."
Which brings us to the next order of business: Would a rising dollar take the wind out of the sails of economic recovery? Well, according to the very same experts who were blindsided by the currency's most recent resurgence -- the answer is NO. "Strong Dollar Won't Derail Commodity Rally," reads a recent Wall Street Journal.
The report goes on to explain how the "usual" inverse link between the dollar and raw materials is no more. A "new dynamic" has apparently emerged by which the "economic recovery will both fuel demand for commodities and help underpin the dollar." It is, so the article said, "a no-lose-kind of phenomenon" in which commodities will rise no matter if the dollar gains or weakens.
To that, the following chart from Robert Prechter's October 2009 Elliott Wave Theoristmakes a compelling contrary argument.
In short, this close-up of the US Dollar Index since March 2008 shows how a rising dollar has coincided with plunging values in gold, silver, commodities, and the overall stock market. Conversely, a falling dollar has consistently supported gains in hard assets, precious metals, and equities.