Over the last few years, the U.S. Dollar has had a strong inverse relationship with the markets and has been a significant factor in determining the ultimate direction equities have taken. One of the most important engines of the bull market rally we experienced from 2009 until a few months ago, was the devaluation of the U.S. Dollar through the actions of the FED which led to a “risk on” environment in which money flowed to the riskier assets capable of providing investors with healthy returns. However, there is obviously another side to that coin and we have seen its effects over the last few months in our current “risk off” environment as scared money has fled those assets in favor of the safe haven the U.S. Dollar provides.
Looking at a chart of the U.S. Dollar index (DXY0) we can see that the dollar has been on a furious rally since threatening to break down to historic lows in late August. It has now broken above a bearish consolidation pattern it had been forming for several months and is back firmly in a long term channel as well as holding above all of its key moving averages.
It is somewhat extended here, and a pull back would give the markets a chance to catch their collective breath as they try to hold their current levels. However, it appears that the U.S. Dollar has broken its multi-year downtrend and is likely to continue to grow stronger over the next few months. Astute traders should continue to keep a close eye on the dollar through instruments such as the dollar index or the eur/usd forex spot pair as it has and will continue to be a very important indicator of our market’s strength.
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