The U.S. dollar is reaching a major inflection point…
From Justin Dove, Editor, The Crux:
The U.S. dollar is reaching a major inflection point… and what it does next could have an impact on nearly EVERYTHING around you.
Below, I’ll share the “most important chart in finance right now.” But first, let me explain why this chart is so important…
As we noted on Wednesday, the prices of commodities, like gold and oil, are directly linked to the U.S. dollar because they’re priced in the currency.
Brian Hunt and Ben Morris explained this concept of “two sides to every price” in a recent DailyWealth Trader essay:
When most folks think about the price of something, they simply think about its cost in their home currency. A book costs $10… Or a bottle of wine costs $30. In day-to-day life, that line of thinking is fine. But it’s only one side of the picture.
When you’re looking at investments, it’s useful to look at both sides…
On one side of a price, you have the asset being measured. That’s the book… the bottle of wine… an ounce of gold. On the other side, you have your “measuring unit.” This is the currency you’re measuring the first side with… like dollars, euros, or Japanese yen.
To understand what’s really happening when prices move, you need to understand what’s happening on both sides of the trade. Either the product, service, or asset has changed in value… or the measuring unit has.
When the measuring unit “zigs,” other assets “zag.” When the dollar falls, the number of dollars it takes to buy an ounce of gold rises. Gold may still be the same price in terms of euros or yen. But because the dollar fell, folks in the U.S. saw the price of gold rise.
But commodities aren’t the only thing a strong or weak dollar affects. Because many big companies have operations in other countries, the dollar’s strength or weakness relative to other currencies has a big effect on corporate profits – and ultimately the stock market.
To keep it simple, a strong dollar hurts profits for multi-national companies, and a weak dollar boosts profits. That’s because you’d rather pay your employees and suppliers in a weak currency and bring in a strong currency from customers abroad. Your earnings will look better just because of the exchange rate (and vice versa).
Then, there’s simply the value of the cash in your pocket and in the bank. If the value of the dollar increases, your purchasing power increases – meaning you can buy more things for $1. If the value of the cash in your pocket decreases, you can buy less things for each $1 bill you have.
That’s why the chart below is one of, if not, the most important chart in finance right now. It shows the value of the U.S. Dollar Index over the past year. This index shows where the dollar stands against a basket of major currencies around the globe.
Right now, it’s reaching a major inflection point… one that could affect everything that I’ve mentioned above. Take a look:
As you can see, the value of the U.S dollar has been fairly level since reaching a peak in March. But right now, the dollar is getting extremely close to that March peak – and what it does from here will have an effect on the price of everything around you… including stocks.
There are two distinct possibilities here…
1) If the dollar can break out to a new high (above the blue line in the chart) then the U.S. dollar will officially be in a new uptrend – meaning it’s likely to continue heading higher. This will put even more pressure on the price of commodities like gold and oil (and the stocks in those industries). It will also suppress multinational corporate profits abroad – meaning it could lead to a decline in many stocks because of poor earnings. But… it will also mean you can buy more things with the cash in your pocket. This is what most folks in the market think will happen… That’s one reason gold recently set a new five-year low.
2) If the dollar fails to set a new high and starts to head back lower (continuing its current sideways pattern), it will likely give commodities prices a boost. Gold, silver, and oil could rally – along with the stocks in those industries. It will also likely be a boost to companies that have large operations outside the U.S. because they won’t have to fight a stronger dollar. But… the cash in your pocket will be less valuable.
Right now, the dollar is closing in on its peak from March. What it does in the days and weeks ahead is likely to have a big impact on almost EVERYTHING around you – and the future direction of all sorts of financial assets.
Investors, traders and consumers alike should keep an eye on this chart right now.