Back in July, we wrote in our July 23 blog that dollar weakness may continue, highlighting a short-term bearish technical case for the US dollar. Since then, the Bloomberg US Dollar Index and the US Dollar Index (DXY) are down 5.3% and 4.1%, respectively.
Today, we take a more long-term look at the dollar and explore the historical reasons why we believe this weakness could be a theme in 2021 and beyond.
As shown in the LPL Chart of the Day, in recent months the US Dollar Index has broken a critical uptrend line that has been in place for nearly a decade. Down nearly 12% since the stock market bottomed in March, the momentum is clearly lower.
However and perhaps more compelling is that the downward movement in the dollar is entirely consistent with a roughly eight-year boom-and-bust cycle that has played out over the past 50 years. The bottom panel shows the rolling eight-year rate of change for the dollar, and the regularity is truly remarkable:
- September 1969–October 1978 (9 years and 1 month): -33%
- October 1978–February 1985 (6 years and 4 months): +93%
- February 1985–August 1982 (7 years and 6 months): -51%
- August 1982–January 2002 (9 years and 2 months): +52%
- January 2002–March 2008 (6 years and 2 months): -40%
- March 2008–December 2016 (8 years and 9 months): +42%
According to LPL Financial Chief Market Strategist Ryan Detrick, “Despite briefly surging in March, the US dollar remains in a secular downtrend that arguably started nearly four years ago. If history is any guide, we could only be at the halfway point of a significant move lower in the dollar.”
The dollar is down nearly 4% since the beginning of November, and while the index is oversold in the very near-term, we remain bearish on the dollar’s trajectory in 2021. We believe this could have positive implications for international equities and commodities next year.
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