US dollar update

To the surprise of many, precious metals and commodity prices have continued to weaken since 2011 as the US dollar has been attracting international inflows. As marked in the chart update below, the $83.50 area on the US dollar index (against a basket of world currencies) is the level to watch for a confirmation of this bullish trend for the greenback; and the likely continuation of pain for commodities and commodity-focused economies like Canada, Australia, Brazil and Russia.

There are a couple of factors that may well continue this move over coming months: contracting world demand suggests further weakness for commodity prices, at the same time that the US dollar receives relative “safe haven” inflows from international capital looking for the most liquid places to park. In addition, in a world of near-zero deposit rates most places, currency appreciation offers the prospects for capital gains in the US dollar as it rallies from a 40% decade-long-decline between 2001 and 2011. With US stocks now priced for flat returns and ungodly volatility from present levels–literally return free risk– it is not necessary to hold dynamite for exposure to attractive return potential as the global economy slows down. But one does have to think outside of the group-think box.
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