Dollar Dynamics

The U.S. dollar, having dropped precipitously since early March of 2009, has turned on a dime and soared upward.  After nine months of persistent weakness, in early December it began to rally, gaining almost 5% in roughly three weeks against an index of currencies that has served as a popular gauge for measuring the dollar’s relative strength versus other developed nations.  More significantly perhaps is a tidal shift in the behavior of other markets.  For the prior fifteen months, equity and commodity prices tended to move counter to our currency, rising when it fell and vice versa some 70% of the time.  Now we have begun to see them all move up together.  In fact, that pattern has now continued for two months, the first time such a lengthy positive correlation has been seen since April and May of 2008, well before the collapse of Lehman. Further, Commodity Futures Trading Commission (CFTC) data shows traders have become bullish on the dollar relative to the Euro for the first time since late April of 2009.  Why the sudden change of heart?  Many of our indicators have begun moving toward or even into positive territory and the markets have often reacted favorably when such data points were released.  Further, while many economists fear the rapid growth in money supply will ultimately prove inflationary, the Federal Reserve actually began draining funds from the banking system in early December, removing almost one billion dollars in a series of operations throughout the month.  Not only could this be causing some investors to view our currency more favorable, it also suggests we could see interest rates move up in the near future, bringing the yield on dollars up even higher than they already are relative to Japan and Europe.  Here at Atlas Indicators we feel the robust nature of this change will allow it to continue for some time; therefore, we are moving the needle for this indicator up a notch with hopes to do more of the same in the first half of 2010.