Over the last four months, the U.S. dollar increased against foreign currencies and put downward pressure on precious metals. While oil also fell, its correlation to the U.S. dollar index was actually positive, indicating the oversupply and capacity issues were the driver of its fall.
The chart below shows the big picture of the U.S. Dollar index over the last twenty years on the left hand side. On the right, we show a ratio of the S&P 500 against global stocks (excluding the U.S.). U.S. stocks outperformed in the late 90s (green line rising) while global stocks took the lead in the early 2000s (green line falling). Since 2008, the S&P 500 outpaced the MSCI All-Cap World Index (ex. US) by a 2 to 1 margin and back to its all-time ratio high (as in 2002), despite the U.S. dollar index only back to the levels of 2006.
There is a large difference between the current positioning of large commercial traders and small (non-commercial) traders. The big ones have the largest number of long position contracts on the Euro ever while small traders have nearly the largest short position on ever. Both are at similar levels to 2012 when the Euro/Dollar exchange nearly tagged $1.20. Today we sit at $1.24. The trading positions relative to the exchange rate each have about a -0.6 correlation, so there is some statistical relevancy to these measures.
Today, many pundits are calling for a spike higher in the dollar, after its 20% rally from 69 in 2012 to 83 today. “Let the trend be your friend” is an old trader maxim, so at this point, it is difficult to bet against it, given the U.S. economic strength relative to Europe and Asia. At the same time, positioning of traders seems very lopsided to its own history and the obvious is not always right. The direction of the dollar affects many asset classes and thanks to its status as the reserve currency, it is still king.
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