I’m often asked about my mentions of the US Dollar Index in SurvivalBlog, and about the Dollar Index ticker link at my Investing Recommendations page. This foreign exchange (FOREX) market index is often mentioned by its shorthand names (“USDX”, “DX”, or less commonly, “USDI”). It measures the value of the U.S. Dollar (USD) relative to several of our country’s major trading partners. Although the mix has changed over the years, presently the index gauges the value of the U.S. Dollar versus six currencies: the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and the Swiss Franc. The USDX was started in 1973 with a base value of 100, and has been calculated versus this base ever since. So a value of 110 would mean that the U.S. Dollar experienced a 10% relative value increase, over the life of the Index.
When I last checked, the USDX was down to 73.896, and that is a troubling number. You see, the high water mark for the USDX was 164.7 in February of 1985 and the all-time low was 70.7 in March, 2008, during the worst of the global credit crisis. It is noteworthy that the value of the Dollar probably would have fallen even lower in 2008, were not for the fact that the Euro was having serious problems of its own. Most of the lows in 2008 were around 72, and that is the number to watch for. A break below 72 would signal a major loss in confidence in the US Dollar, and possibly precipitate a full-blown Dollar Panic. Unlike 2008, we can expect no “Dollar Rally” if the USDX again drops below 72. This time there won’t be a “bounce” because there is no longer much of a floor beneath the U.S. Dollar. Currency traders now perceive the U.S. Dollar for what is truly is: kindling. Unless monetization of the Dollar (“Quantitative Easing”) ends soon, there is a strong likelihood of mass inflation in the U.S. and a rout of the Dollar in the FOREX markets.
Don’t under-estimate the influence of the FOREX markets. They are the world’s most traded markets, with more than $3.2 trillion in currencies traded each day. Clearly, the FOREX markets are seeing some tidal shifts in currency pair trading. For example, just a few years ago the Australian Dollar was jokingly nicknamed “The Australian Peso”, but just recently (April 25th), it hit a 29 year intra-day high of USD $1.0777. Meanwhile, the Swiss Franc has advanced to USD 0.88576 and the Canadian Dollar is relatively strong, at USD 1.04873. You can track daily currency exchange rate moves at Oanda.com.
An aside: Some journalists refer to FOREX as a singular: “The FOREX market”. But since they are actually multiple markets that are being traded 24 hours a day, five days a week, in multiple venues, rather than at one central clearing house. So, properly, the FOREX should properly be described as plural, namely “The FOREX markets”.
Regardless of your interest in stocks, bonds, the credit market, or the precious metals market, you should watch US Dollar Index. It is not just something of interest to travelers or to currency speculators. Rather, it is an important barometer for the U.S. Dollar. As I’ve mentioned before, it is likely that the U.S. Dollar will lose its reserve currency status soon. And when it does, be ready for substantially higher interest rates, a huge loss in the Dollar’s buying power abroad, and mass inflation, at home.
I once again urge SurvivalBlog readers to get out of US Dollars and into precious metals and other useful tangibles. Presently, silver and common caliber ammunition are my two favorite tangibles.