Created in 1973 after the disbanding of the Bretton Woods system, the US Dollar Index is comprised of the exchange rates of the EuroFX, Canadian Dollar, British Pound, Japanese Yen, Swedish Krona and Swiss Franc. Its highs have taken us to around 160 and the lows about 70.
During these times of record high unemployment, uncertainty in the economy and apprehension of our current administration, the US Dollar Index has maintained a spotlight position in the futures markets. When the unemployment numbers are high, often foreign investors may cash in US Assets such as stock and/or bonds to transfer the money back into the currency of their country to invest in other assets.
For years, we have enjoyed the inverse relationship between other currencies such as the Euro FX and the US Dollar Index. In recent times, The US Dollar has particularly been used as a guideline to the moves of the Gold Market. As of late, the E-Mini S&P 500 and most of the tangible commodities markets will weigh the impact of the US Dollar moves. US exports will often benefit from a weaker US Dollar and other countries may show their exports reduced for that time frame. Additionally, the federal government often will increase spending to put more money in circulation, so that jobs become more readily available and earning power goes back into our citizens.
Lately, the Federal Reserve has remarked many times about providing additional stimulus as needed. While those magic words seem to keep our Stock Indices on higher ground, it essentially equates to printing more money and increasing debt. What is relevant to today’s emphasis on the US Dollar is the upcoming Election paired with the next Federal Open Market Committee (FOMC) Meeting. This week’s trading shows signs of the uncertainty going into next week with unusual reactions to our usual supply/demand reports and economic data. We can only ascertain that the jitters may remain going into GDP Friday and the main events of next week.
The US Government has committed to purchasing our interest rate products over the next six months to provide further stimulus. The US T-Bonds, US Dollar Index and Gold are sometimes regarded as safe-haven products that may trade together during times of severe uncertainty. The allocations of funds at times can be viewed as they will come out of one instrument and flow into another.
Some of the commodity markets have acquired more money flowing in while the US Dollar has come off the June highs of $89.00 to the recent lows of $75.85. While some traders may be using the US Dollar Index as a benchmark to evaluate the E-Mini S&P 500, Gold, Silver, Copper etc., we may look for a potential trade in the US Dollar as it sets up with our indicators. We may experience some erratic movements this week and the first part of next week, so we potentially may see a couple of spike downs yet in the US Dollar Index. Technically and fundamentally, we may be setting up for a buy.
If the Federal Reserve retreats from its previous enthusiastic stimulus, this US Dollar may strengthen. One may wish to look for a lower entry such as $77.50 to potentially take advantage of a long-term US Dollar move. It is vital to evaluate your risk with a worst case scenario and place a stop loss in accordance with your risk parameters. Please discuss the risk/loss with your broker to determine if a trade of this nature may be within your personal risk parameters.
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