Unrelenting strength in the U.S. dollar has held many asset classes hostage.
A stronger dollar directly impacts the ability of U.S. businesses to sell products and services abroad (because a strong currency makes prices look relatively higher to overseas consumers). In addition, persistent and sticky inflation along with global political turmoil has made the dollar more attractive for those looking to park money in hopes of being paid to wait things out via the interest-rate differential.
Whether you are speculating in currencies or commodities, or are a long-term investor in stocks and bonds, you are indirectly trading the U.S. dollar. For example, the U.S. dollar index traded on the ICE exchange settles in the opposite direction of the S&P 500, Nasdaq, Dow, and 10-Year Note futures roughly 90% of the time (according to data compiled over the previous 60 trading days).
According to Bloomberg sources, the most overcrowded trades are currently long the U.S. dollar and long crude oil. Both of these speculative (or perhaps inflation-hedging) positions have been perpetually overcrowded since the Russian invasion of Ukraine. However, one is not like the other.
The oil market has fallen sharply from its 2022 high of $130.00 per barrel to a recent low of about $75.00. On a side note, it is rather remarkable that speculators are still "too long" the oil market on the heels of a $55.00 decline!
Back to the greenback; it's the one asset that has yet to undergo mean reversion. All other commodities, stocks, and bonds have done so since the initial jolt of volatility earlier this year as political and central bank chaos made its way through the markets.
Can the greenback continue to be the last holdout of 2022? It can, but it is unlikely that it will.
Weekly U.S. Dollar Chart
Historically, the dollar has been known for dramatic tops. The last three tops have followed a trendline that dates back to 2016, which currently lies near 113.40. We've been watching this level for weeks as a potential area of reversal. Our analysis was looking for a weekly close above or below this line to confirm either a dollar top or a continuation to the all-time-high price of 120.00. Thus far, the dollar index has not been able to close above 113.40 but it has spent some time above the pivot price on a temporary basis.
As long as this continues to be true, as we expect, the dollar index will become progressively more susceptible to gravity. In other words, it "should" suffer the same fate other asset classes have -- mean reversion trade to a more natural price level. According to our chartwork, the first bearish target would be about 105.00 but a round trip to 97.00 is possible with a much longer time frame.
Chart Source: QST
A weaker dollar would unhitch the plow on nearly all assets, even if all else remains equal. In other words, even if inflation, high-interest rates, and political turmoil persist, many assets can increase in value simply because the dollar loses value. The obvious beneficiary will be the equity market and Treasuries, but discounted commodities such as the softs (coffee, cocoa, cotton), grains (wheat, soybeans, and to a lesser extent, corn), metals (gold, silver, copper, and energies (crude oil and natural gas).
