- Euro (EUR), 57.6% weight
- Japanese yen (JPY) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF) 3.6% weight
The dollar, or any fiat currency, has no intrinsic value whatsoever. It can only be measured against the purchasing power of other currencies. By this measure, the USD goes up when this basket of currencies goes down, and vice versa. The Euro, clearly the heaviest weighting at 57.6%, has four times the influence the next closest weighting, the Japanese Yen. So obviously any moves in the Euro will have an exaggerated effect on the USD.
Which is exactly why we've seen this sudden, explosive move upward in the dollar over the last week:
Switching gears, back on August 1st, I argued that a close above 81.60 would be short-term dollar bullish. I put a caveat out there stating that there is long-term resistance in the mid-82s which would keep any rallies in check around that level. Well, the USD did, in fact, close above 81.60 on August 13 and it absolutely proved to be bullish. What I failed to appreciate, however, was at what level it would start seeing resistance. In my previous post, I examined a 10 year monthly chart going back to 2004. I needed to go back further (much further) to see the following:
Putting everything together, we have a dollar that's rallying not because of intrinsic strength, but because the currencies against which it is valued are in free fall. It appears that sometime soon, in that 86-87 range, the USD is going to encounter some serious resistance. And where will that resistance come from? Perhaps an end to the taper and another round of QE by our Fed? Or perhaps foreign countries begin dumping their US treasury holdings flooding the world with supply? Or maybe something else entirely - some unknowable, black swan type event. The bottom line is twofold: 1) don't be fooled into thinking that our dollar represents economic strength (because it doesn't) and 2) while the current rally has a bit more room to go, the chart suggests it will be yet another intermediate top on its way lower.