The dollar is in the spotlight this week.
The Federal Open Market Committee (FOMC) meets Tuesday and Wednesday to decide what to do about interest rates, bond purchases, and any other assorted quantitative easing (QE) methods.
And – whatever the FOMC decides – the dollar looks set to make a big move one way or the other…
The Fed has been reasonably clear about its intent.
In previous statements, the Fed has indicated that it won’t consider raising interest rates until late 2022 or early 2023. But, the Fed is looking to taper the impact of its bond purchasing program as early as this month.
Of course, “tapering” is the start of lessening the quantitative easing (QE) policy that’s been in place for 13 years. That’s positive for the dollar… and the dollar has been rallying for the past few months in anticipation of this tapering.
From its low in June to its high in early October, the U.S. dollar rallied about 6%.
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That’s a huge move for a currency. And – as I argued back in September – that’s about as good as it gets.
The U.S. Dollar Index (USD) is slightly higher today than it was back then. But, it looks to me like it’s sitting on a pivotal level.
And, the FOMC statement on Wednesday is likely to provide a catalyst for the dollar’s next big move.
Here’s the chart…
Since it bottomed in May, the buck has been in a rising channel pattern (red lines) – with a series of higher highs and higher lows.
The dollar index is sitting right on the support line of this pattern.
So, it’s set up to either bounce off of support – which would lead to a rally back up to a new high for the year… or breakdown below the support line – which would indicate the start of a new decline phase.
My guess is that the buck is ready to break down…
Like I said, the Fed has been reasonably clear in its intent to start the “tapering” process. And, the dollar has rallied over the past few months in anticipation of that intent.
So, the “odds on” bet would be that the Fed sticks with its intent to taper the bond purchasing program starting this month.
But what if the Fed pauses here? What if the recent weak economic reports cause the Fed to delay the tapering? What if Wednesday’s FOMC announcement on interest rates is more “dovish” (keeping rates low) than “hawkish”?
That’s the sort of scenario that could create a breakdown in the dollar index, and lead to a declining dollar over the next few months.
I’m more inclined to bet on a breakdown in the buck right here – rather than another rally. But, it could go either way…
We’ll likely get our answer by Wednesday afternoon.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, Market Minute subscribers write in about Jeff’s recent essay on orchids and gold…
Dear Jeff, I’ve followed you since your happy days at Stansberry. I still remember you during August 2011 when gold was $1,900 and the whole world, including myself, was sure we were going to the moon. You said, “No, it tops here.” And of course, you were right.
Today, two very smart people are screaming “Buy gold stocks!” It’s you and Jesse Felder. I have no doubt that one year from now your call to buy gold stocks will be a call to remember.
– Eli
I enjoyed your little anecdote about your wife’s orchids. We need to consider owning gold or gold stocks as an insurance policy rather than an investment. We hope we never need to cash in on our home or auto insurance policies, but it gives us peace of mind and some protection – just in case.
Likewise, buying gold stocks is protection against a market crash – we hope that doesn’t happen. And we should be happy if gold languishes since that means our other investments are doing okay.
– Robert
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].