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4 More Years of Dollar Weakness?

Back in July, we wrote in our July 23 LPL Research blog that dollar weakness may continue, highlighting a short-term bearish technical case for the US dollar. Since then, the Bloomberg US Dollar Index and the US Dollar Index (DXY) are down 5.3% and 4.1%, respectively.

Today, we take a more long-term look at the dollar and explore the historical reasons why we believe this weakness could be a theme in 2021 and beyond.

As shown in the LPL Chart of the Day, in recent months the US Dollar Index has broken a critical uptrend line that has been in place for nearly a decade. Down nearly 12% since the stock market bottomed in March, the momentum is clearly lower.

Bearish Technical Picture for the Dollar

However and perhaps more compelling is that the downward movement in the dollar is entirely consistent with a roughly eight-year boom-and-bust cycle that has played out over the past 50 years. The bottom panel shows the rolling eight-year rate of change for the dollar, and the regularity is truly remarkable:

  • September 1969–October 1978 (9 years and 1 month): -33%
  • October 1978–February 1985 (6 years and 4 months): +93%
  • February 1985–August 1982 (7 years and 6 months): -51%
  • August 1982–January 2002 (9 years and 2 months): +52%
  • January 2002–March 2008 (6 years and 2 months): -40%
  • March 2008–December 2016 (8 years and 9 months): +42%

According to LPL Financial Chief Market Strategist Ryan Detrick, “Despite briefly surging in March, the US dollar remains in a secular downtrend that arguably started nearly four years ago. If history is any guide, we could only be at the halfway point of a significant move lower in the dollar.”

The dollar is down nearly 4% since the beginning of November, and while the index is oversold in the very near-term, we remain bearish on the dollar’s trajectory in 2021. We believe this could have positive implications for international equities and commodities next year.

For more of our 2021 market insights and forecasts, including our positive take on emerging markets, please read our new LPL Research Outlook 2021: Power Forward.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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