Why weak $ continues to rally, despite strong crude and gold

By George Albert

Increased risk aversion in the global markets has led to a rally in the dollar once again, with the greenback now attempting to break out higher.

The greenback is inherently weak, given the US economy’s weak macro-fundamentals, with a long term bearish trend. Each time it attempts to rally, bears push prices down.

Anaemic economic growth, substantial monetary easing and the precarious fiscal situation in the US are all weighing down the dollar. Hence the rallies in the dollar have not been sustainable.

The dollar, however, has no strong alternative as a reserve currency. As a result each time there is a crisis looming on the horizon, investors pile on to the dollar. Given the risk of a default by Greece, the euro has been selling off and the dollar rallying.Though Germany has okayed another Greek bailout, the crisis may not be over.

[caption id=“attachment_31274” align=“alignleft” width=“380” caption=“Gold is consolidating after a long rally to the upside, which is a sign of continued bullishness. Reuters”] [/caption]

In the week to June 24, the dollar rallied and reached a key area from where it has sold off in the past. The dollar index, which measures the dollar against a basket of six major currencies, has not be able to rally above the 76-76.50 level. On Friday, the index closed at 75.67 after a strong rally.

If the index is able to close above the 76.50 level, the dollar can rally higher. However, given the inherent weakness in the greenback, the rally is likely to be extremely slow.

There have been a few signs showing that the dollar might rally despite its fundamental weakness. Each time the bears try to push the prices down from the 76 to 76.50 level, they have not been successful in making a new low.

Prices, on the other hand, have made higher lows. A higher low is made when the latest low in prices is higher than the previous low. Such price action shows that buyers are gaining control, which is likely to take the dollar higher.

Crude Oil: In our last column , we had mentioned that the uptrend in crude oil was facing a challenge. The price of crude has to break below $90 per barrel for the uptrend to be broken. In the week to June 24, the crude oil contract of light sweet crude traded on the Chicago Mercantile Exchange closed at $91.16 per barrel.

The fact that the prices did not close below $90 per barrel indicates the resilience of crude. Remember that governments globally have decided to release oil from their reserves to bring down prices at the pump. Such a step usually has a very strong impact on the price of crude, but not this time. Since the governments plan to release more oil going forward, it’s very likely that prices will fall and the uptrend will be broken.

For now the market perceives the release of oil from official reserves as a sign of panic from governments. Market players await the time when this policy tool is exhausted and prices begin to rise again. The price of oil is being driven largely by the accommodative monetary and fiscal policies of the US. Unless that’s fixed, we could see continued strength in the price of crude.

Precious metals: Even as the dollar rallied last week, both gold and silver sold off. However, the uptrend in gold is still intact, but silver has turned bearish. Gold is consolidating after a long rally to the upside, which is a sign of continued bullishness. The bullishness would be broken only if gold falls below the consolidation pattern, but that has not yet happened.

Silver, on the other hand, had a sharp fall and then consolidated for a few weeks. It has not continued to fall from the consolidation pattern, indicating that the downtrend has resumed.

George Albert is a Chicago-based trend watcher and edits www.capturetrends.com