As December ADP employment change hits record highs, U.S. Dollar Gains in Asian Markets continues to rise. The U.S. dollar index is on a rebound and is touching its highest level since early 2021. China’s economy is slowing down, but the People’s Bank of China has been easing monetary policy (the kind of easing only a government can do) and the Purchasing Managers Index (PMI) is still high. Is this all a clever U.S. government “propaganda” or what? If so, it seems the world has become a much less complex place – at least for those who want to keep things simple and in the black.
No matter what investors believe, the U.S. Dollar Index will continue to trend higher until we hit two years of high inflation. When that happens, dollar gains will slow to a stop. If oil prices remain high, it could take four years to reach double-digit price gains. Why? Because oil (and the dollar) are a commodity and an inflationary economy would prevent price increases (unless the government decided to “leverage” its buying power).
Another potential pitfall for the U.S. Dollar Index is political unrest. After all, the current unrest in Egypt and the upcoming elections in Tunisia could result in instability for the dollar. In both cases, gold (the standard hedge against inflation) will likely skyrocket if the political situation worsens. This will most likely cause volatility in U.S. Dollar Index futures markets (the price of oil and gold will increase if the stability vanishes). It’s a potential disaster waiting to happen.
The good news is that there are some inflation indicators that can provide price support for the U.S. Dollar Index. The price of oil, copper, natural gas and gold are all expected to increase over time. A key component in maintaining a strong dollar is a stronger dollar relative to other currencies. This is a favorable trend that will provide long term price support for the U.S. Dollar Index.
In addition to the above mentioned commodities, the price of gold is expected to increase over the coming year. With a third of the world’s supply of precious metals stored in the U.S., the demand for gold (and silver) will increase. Gold has been called “the true cure for the disease of modern society” because it is a “consumable” asset that doesn’t lose its value. Due to this quality, the dollar loses less value when it is “consumed” by investors and banks. This means that as precious metals become more expensive (and therefore harder to get), the U.S. Dollar Index will be supported due to the relative strength of the U.S. Dollar.
In addition to the above mentioned commodities, the price of oil is expected to rise over the next year. The recent price increase in the cost of oil may be partially tied to the upcoming refinery outage in the Gulf of Mexico. An oil refinery in northern California closed on Tuesday night after explosions occurred inside the facility. According to the media reports, one person was killed and at least five others were injured. If confirmed, this tragic event could lead to further oil price increases and further dollar gains in the U.S. Dollar.
The U.S. Dollar Index is expected to strengthen slightly from current levels over the coming year. However, the U.S. Dollar Index is currently far too high compared to world crude prices. To support the dollar, investing in precious metals would be a good way to gain exposure to the greenback. If the current trend continues, we expect oil prices to remain very high over the coming year.
Commodity markets tend to follow a certain pattern over time. Gold and oil are expected to benefit from an increasing demand from China and other emerging markets while new growth opportunities emerge in the U.S. Dollar Index due to the slow but steady increase in employment and consumer spending. These factors will not change the current status of the U.S. Dollar Index, which is far too high when compared to world commodity prices. Therefore, we do not see a situation where the U.S. Dollar Index will experience a significant appreciation. The next few months will determine whether the U.S. Dollar Index will experience a continued uptrend or a drop in prices. We will provide updates on the U.S. Dollar Index as events transpire.