U.S. Dollar Index : Updated Charts

With the Federal Reserve surely cutting rates today by at least 75 basis points, the 68.15 target for the U.S. Dollar Index might be within reach. The price of oil looks to have failed at the $111.25 target level, so the idea of buying oil as a dollar hedge might be over for now.

Below are two U.S. Dollar Index charts, one with the 10 year Treasury Yield.

U.S.Dollar Index (click to enlarge)

U.S.Dollar vs. 10 Year Treasury Yield

U.S. Dollar And Inflation

The Federal Reserve has chosen to attempt to support the weakening economy and to deal with inflation later when the economy improves. One problem is inflation is already here and it doesn't seem to be weakening. Add to the mix that the Fed seems to be set on cutting interest rates again, the weakening dollar, you get a set up that makes it very difficult for commodity prices to retreat.

A look at the chart of Light Sweet Crude tells the story. As the United States' economy has slowed, expectations for global growth have been re-evaluated. Add to this the repricing of risk due to the over leveraging of financial institutions, caution has caused growth expectations to slow around the globe. That being said, looking at the price of Oil at $110, one would think that demand is sky high. It is not. Some commodities are now experiencing a disconnect from the forces of supple and demand. As the U.S. Dollar continues to weaken due to the lowering of rates and the flooding of liquidity by the Federal Reserve, as well as financing our excesses by debt, Oil and some other commodities have become a U.S. Dollar hedge. As oil and gas inventories come out here in the U.S., it is clear to see that the price of oil is not just a function of supply and demand any more. As the economy slows, and inventories build, the price of Oil should come down. This can not happen while the U.S. Dollar continues to fall.

This chart compares the price of Oil to the U.S. Dollar Index. At what point will the momentum of the Dollar's decline slow to the point to allow speculation in Oil as an ill advised hedge to be reduced? My calculations show that $111.25 is a price that could be a short term top, but that could easily be breached and prices running to $114.05 followed by $116.85. As long as the Fed is cutting rates, and becoming ever increasingly creative in bailing out financial institutions that should be left to swing in the wind, confidence in the dollar will continue to weaken.

Light Sweet Crude vs. U.S. Dollar Index

Applying Opening Range To Light Sweet Crude

The same system that the previous posts applied to the S&P 500 Index can be applied to other indexes, equities, or commodities. Below is a chart of Light Sweet Crude. The opening range is marked by the red circle and shows the highest high of the first three days (100.05) and the lowest low of the first three days (97.25). Subtracting this lowest low from the highest high gives us an opening range of 2.80. This value is then added to the top of the range in multiples to give us price extension levels once prices break above the opening range. The same value is subtracted from the low of the range in multiples to give us extensions levels once prices break below the opening range.

Light Sweet Crude (Click to enlarge)

S&P 500 Updated Chart

S&P 500 Index(click to enlarge)
This chart shows that prices are firmly below the last triangle pattern. After the initial break below, there was one attempt back to the lower trend-line which failed. Since then prices went back down the second target price based on the opening range. It will be important to watch if the 400pt positive day for the DOW 30 can hold and act as support. Giving up this gain will be a sign of more weakness. Below is a monthly chart of the S&P 500 to give a longer term picture.

S&P 500 Index(click to enlarge)

U.S. Dollar : Where Is The Bottom?

The U.S. Dollar use to be a safe haven when ever economic storms were on the horizon. With the inflating of every possible asset bubble over the past decade, the Federal Reserve has now decided to continue cutting rates when there is in fact little bubbles worth inflating.

It is often said that "this time things are different", but human nature never changes. Cycles happen and while they might be derailed for periods of time by outside influences, they all eventually run their course. As the Federal Reserve continues to cut rates and flood the market with liquidity to keep this economy oiled, the effects of their action counter every stimulus they attempt to create. They can only cut rates to zero and they can only cut down all the trees and print dollars, but when this doesn't work, what will they attempt next. The rates they keep lowering now are not effecting mortgage rates and does not seem to help the people it is intended to help, if you believe Washington. As they cut rates the dollar continues to fall and this causes inflation to become the main culprit. In a few months time inflation will become the headline of the news cycle, and the Fed will make some statement like a light bulb just went on. The chart below shows an example of the increase in the price of oil as the U.S. Dollar declines. Supply and demand aside, the dollar, the Federal Reserve, is responsible for this climb.

U.S. Dollar vs. Light Sweet Crude

As this chart shows they are almost a mirror image. The good news is that the Federal Reserve can only cut rates so far, and as they approach this level, expectations will start to look out for them to raise rates because of inflation fears. The chart below shows the S&P 500 Index and where interest rates were back in the booming 1990's.

S&P 500 And Interest Rates
The dollar should begin to strengthen when the Fed can not cut rates anymore and decides to focus on inflation. When oil goes from $110 back to $85, it will be seen as a new boom for the economy. Then the focus will be back onto which economy in the global market is growing the quickest, and has the most potential for growth.