US Dollar Collapse: What Just Happened?
Currency markets went bonkers yesterday.
What happened?
Put simply- the US Dollar index imploded. In fact, the greenback suffered its worst one-day loss of the year, giving up 1.28%.
Take a look…
What caused this intense bout of selling?
It was actually due to a number of things. But the selloff started when the European Central Bank (ECB) surprised investors by failing to cut interest rates yesterday.
With Europe teetering on economic depression, economists thought the ECB would take a proactive approach towards promoting economic growth in the region.
But they didn’t.
Instead, the ECB left interest rates unchanged. That sent the Euro surging to its highest level vs. the Dollar since February 2013.
And that’s not all…
The Japanese Yen made an explosive move higher yesterday as well.
As you may know, the Yen has weakened substantially vs. the Dollar in 2013 thanks to the Bank of Japan’s (BoJ) new easing program. In April, BoJ Governor Haruhiko Kuroda set a two-year time horizon to achieve 2% inflation in Japan.
Due to this goal, Japan’s monetary base is expected to grow to 270 trillion Yen by year-end 2014. Not surprisingly, investors have fled the Yen ever since that plan was announced.
That is, until yesterday…
A massive Yen spike sent the Greenback spiraling downward. The intense Yen rally is likely due to increasing investor uncertainty about the BoJ’s easing program. I believe many are now betting the inflationary program will backfire, creating enormous problems for Japan.
What does all this have to do with commodities?
As you may know, commodities generally trade opposite the US Dollar. In other words, when the Greenback rallies, hard assets usually trade lower. So seeing this newfound weakness in the Dollar is lending credence to the idea that commodities are set to rally.
In fact, many commodities have already turned in strong gains this week…
- Cotton is up 7.4%
- Cocoa rallied 7.1%
- Platinum bounced 4.4%
- Palladium ran 1.0%
Of course, underlying supply/demand factors are at work here too. But there’s no doubt that the weakening Dollar is having its effect. And the lower the Greenback goes, the more capital that will flow back into hard assets.
So just how far can the Dollar fall?
Take a look at this updated chart I showed you a few weeks ago…
As you can see, the $84 technical resistance area was too much for Dollar bulls to handle. As a result, the Greenback is moving down towards the $79 support level. We’ll likely get an oversold bounce in coming days, but odds are the Dollar continues lower into Summer.
Bottom line…
Don’t underestimate how quickly commodities can rise in the face of a falling US Dollar.
If the Greenback’s recent weakness continues, we’ll likely see strong gains for specific commodities in the near future.
Stay tuned to Commodity Trading Research for timely research as well as ideas to capitalize on price fluctuations in various hard assets!
Until Next Time,
Justin Bennett
Category: Commodity Trading
