In My 2 Cents on the Dollar I explained how the U.S. Dollar is a significant driver of returns of other markets. For example, when the U.S. Dollar is rising, commodities like gold, oil, and foreign currencies like the Euro are usually falling. A rising U.S. Dollar also impacts international stocks priced in U.S. Dollars. When the U.S. Dollar trends up, many international markets priced in U.S. Dollars may trend down (reflecting the exchange rate). Many trend followers and global macro traders are likely “long the U.S. Dollar” by being long and short other markets like commodities, international stocks, or currencies.
Below was the chart from My 2 Cents on the Dollar last week to show the impressive uptrend and since March a non-trending indecisive period. After such a period, I suggested the next break often determines the next directional trend.
Keep in mind, this is looking closely at a short time frame within a larger trend. Below is the updated chart today, a week later. The U.S. Dollar did break down so far, but by my math, it’s now getting to an even more important point that will distinguish between a continuation of the uptrend or a reversal. This is the point where it should reverse back up, if it’s going to continue the prior uptrend.
This is a good example of understanding what drives reward/risk. I consider how long the U.S. Dollar I am (by being synthetically long/short other markets) and how that may impact my positions if the trend were to reverse. It’s a good time to pay attention to it to see if it breaks back out to the upside to resume the uptrend, or if it instead breaks down to end it.
That’s my two cents on the Dollar… How long are you?