The US dollar is in a bull market. That’s bad news for most assets

Even with the Federal Reserve printing money hand over fist, the US dollar has made a bottom and is now in a bull market. That has serious implications for investors, says Dominic Frisby.

US dollar bills
The US dollar wants to go up
(Image credit: © Thomas Trutschel/Photothek via Getty Images)

The big story now, as far as I’m concerned, is that the US dollar is in a bull market.

As a “sound money” advocate, I would prefer it were not so. Gold, miners, bitcoin – they all do better when the dollar is falling. Our anti-fiat-money biases are confirmed when the dollar is falling.

“Look, the Fed is printing money”, we can say, “and look at the resulting loss in purchasing power.”

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The Fed is printing money. And fiat money is losing its purchasing power, especially against debt-based financial instruments. Such as houses.

But let us not gloss over the fact that the US dollar has made a clear bottom. To do so would be to delude ourselves. The US dollar is now rising. It is in something of a bull market. And there are investment implications to that.

The US dollar’s double bottom

Starting with the US dollar index, which is the dollar versus a basket of the currencies of its major trading partners (the euro, the pound, the yen, Canadian dollar and so on), here is the offending chart – as textbook a “W bottom” as you will ever see.

US dollar chart

Those forex traders who trade by patterns will be all over this, and those who follow trends will be starting to join them. The implication is that it goes higher – probably to the high 90s (this is an 18-month chart, by the way).

Note that the May low for the US dollar was slightly higher than the January low – the right hand side of the W (the double bottom) – is slightly higher than the left. The pattern guys will be loving that.

We have been warning for some time on these pages about the 89 area on the US dollar index. If it doesn’t hold, then the dollar probably goes to the low 80s, maybe lower. Gold goes to $2,500 an ounce or more, bitcoin to $100,000, oil goes to $150 a barrel, and metals go to the planets – the moon, Jupiter, Mars et al – whence they came.

However, if that 89 area holds, then the inflationary trend of the last year or so that we’ve seen in commodities comes to an abrupt halt. That 89 area has held.

And meanwhile, the bull market in commodities has – oil aside – come to a juddering halt. Precious metals, base metals, softs and grains – they are all now in intermediate downtrends.

The yen, the euro, the pound and the Canadian dollar have all turned down too.

The trend is your friend. Don’t ignore it.

Oil is laughing in the face of the stronger dollar

One inflationary asset is not having it, however: oil. Rising US dollar or not, oil is grinding higher. It is in a bull market. Be long oil.

Oil demand is rising. We keep banging the drum about it on these pages. The green energy revolution needs a lot of oil to make it happen. Meanwhile, government policy dramatically disincentivises investment in oil exploration and development. What’s the result? Higher oil prices. Everybody pays. The poor are hit hardest.

Let’s spell it out in case there’s any doubt: the green energy revolution is driving the oil price higher. Government policy is driving the oil price higher. We are in the realm of unintended consequences, where government policy reigns supreme.

When oil goes above $100 – next year, probably – “greedy oil companies” will get the blame. The fault lies with deluded policy.

But back to the focus of today’s Money Morning – Uncle Sam’s currency. Now we zoom out and consider a longer term chart. This is the US dollar index over the last ten years. And we note, in the blue shaded area, that support zone at 88-89 was also visited in 2018. And that a much longer-term W could be forming (as drawn in red).

US dollar chart

Is this something to be concerned about?

Possibly. The pattern recognition purists will say that a classic double bottom needs to come at the end of a downtrend. This multi-year double bottom came after an uptrend. That doesn’t rule out the scenario that this a multi-year W, but it is not as clear-cut as the shorter-term pattern with which we began this article.

In fact, more clean-cut is the double top – the “M” top around 104 – which heralds lower prices.

Ah, technical analysis is in the eye of the beholder.

A more likely scenario over the longer term perhaps is that we range trade. Perhaps we get runaway inflation and commodity prices in non-US-dollar currencies, while the US dollar sees an influx.

Impossible to know. But in the shorter term – and by that I mean the next few months – it looks like the US dollar wants to go up.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

Dominic Frisby

Dominic Frisby (“mercurially witty” – the Spectator) is, we think, the world’s only financial writer and comedian. He is the author of the popular newsletter the Flying Frisby and is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. 

His books are Daylight Robbery - How Tax Changed our Past and Will Shape our Future; Bitcoin: the Future of Money? and Life After the State - Why We Don't Need Government. 

Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art. You can follow him on X @dominicfrisby