US Dollar Soars, Trading to a Fourteen Year High

Yesterday’s statements made by the Federal Reserve are just beginning to be processed by traders and investors. The immediate knee-jerk reaction and response has now dissipated.

Whereas the rate hike of 25 basis points was expected, the Fed’s forward monetary policy, targets, and projections for 2017 were not. The investment community was taken by surprise as they learned of the Federal Reserve’s intention to raise rates a total of three times next year rather than two. This fresh and hawkish news obviously alludes to a much sharper and deeper path for US interest rates next year.

The net result of this Fed announcement is a return to higher equity pricing and a stronger US dollar, leaving the precious metals behind. In trading today, the US dollar reached a 14-year high as it gained almost 1 ½% in value moving the index above 103.

Gold prices lost over a full percent of their value today. 98% of that loss was directly due to a strong US dollar. Silver lost almost 5% of value in today’s trading, with over 3% directly accountable to selling in the market.

How High is High? US Dollar: A Historical Perspective

This most recent surge in US dollar value beckons the question: how high is high? Historically speaking, we have not seen the US dollar at this level since December 2002.

However, this price point needs to be put in historical perspective to gain a more dynamic understanding of where the US dollar could inevitably trade over the next few years.

In January 2002, the Dollar Index was at the tail end of a multiyear climb which began in 1995. Trading from approximately 80, the Dollar Index rallied for seven years, culminating with a double top at 120.

From there, US dollar values began to drop dramatically, resulting in a basic freefall, which concluded in 2008. Losing over 50 points, the US dollar traded to a low of 70 points. Which takes us to the US Dollar’s current rally. It began in May 2011, and is now back to a value not seen since December 2002.

So, how high is high? On a technical basis, the US dollar has no real resistance until 105. However, based upon this historical perspective, we could see the Dollar Index continue to gain value. In fact, to take out the highs reached in 2002, the Dollar Index would have to trade above 120. In other words, technically, there is still plenty of room on the upside for the dollar to go.

Wishing you as always, good trading,