Many pundits and forecasters out there believe the dollar to be overvalued right now. Well,
certainly by the most recent matrix there is an argument to support that view. However, if
one steps back in time and looks at where the dollar is relative to where it has been over the
past 30 years then that perceived ‘overvaluation’ argument would seem to hold less water.
Now of course within that general overvaluation assessment there are considerable
contrasts versus many currencies, which in some cases are quite marked. For example, the
US currency is strong versus the EM and and the GBP right now, but certainly not so versus
the CHF and the JPY.
So, for the purposes of this article I am going to focus on the USD index; whilst not a perfect
benchmark: is nevertheless a good barometer by which to gauge the relative strength or
weakness of the dollar as it is based on a basket of other currencies.
In 1985 the worlds leading central banks (Just the G7 back then) got together to force down
the value of the dollar as they felt it was dangerously overvalued, particularly versus the
Deutschemark and the Japanese Yen.
This action to lower the dollar was known as the ‘Plaza Accord’. Prior to this first ‘co-
ordinated’ central bank intervention the USD index had been trading above 160. Following
their intervention, and over the next 2-3 decades the USD index more than halved in value,
eventually falling back to a low of 70.69 in 2008.
Perhaps interesting that this low point in the dollar, of the past 50years, coincided with the
onset of the financial crisis- a crisis we are led to believe is now well and truly behind us.
Since then, over the past decade, the dollar has been on the rise again, pushing back above
103 by the middle of last year. The upside run from above that low, which effectively
started at 72.69, rose to a 2017 high of 103.82. It also unfolded in a very definable 5-wave
price pattern. This is known as an Elliot wave sequence.
I know it was very definable because I not only tracked it closely over the whole period, but
also traded around the various waves from a selectively long dollar stance as and when it
However, the failure of the 5 th and final upside wave to really accelerate to anything like its
potential (stalled at 103.82) is what gave rise to the sell off at the beginning of 2018- a sell
off that saw the USD index fall back to as low as 88.25 in the first quarter of this year. That
low reached an absolutely perfect 50% retracement of the whole move, from its 2011 low at
72.69 to its 2017 high of 103.82.
To better illustrate that please take a look at the chart below which clearly shows that
whole move and where you can see just how the sell off in the dollar totally nailed that 50%
retracement level- the blue parallel line.
As you can see the latest rebound from that 88.25 level has so far made it to just shy of
97.00 (96.98 to be exact)- a level reached on the 15 th August and very nearly matched again
last week when the USD index rose to a high of 96.86 before backing off into the close on
So what does all this tell us? Well, If the move from 72.69 to 103.82 was the first wave in a
potentially longer term 5-wave mega upside cycle in the dollar, then the relapse to 88.25
could have been the second- a corrective move.
If that’s the case, then all the time price remains above that Q1 2018 low at 88.25, the
potential for the current 3 rd wave to move considerably higher is most definitely live. If
indeed that is so, then we should be talking about a wave that could lead us eventually
through 103.82 and up towards 119.38.
Now, a lot of people won’t agree with that prognosis I’m sure and certainly not those
looking for a cyclical quarterly relapse in the dollar by the end of this year. Irrespective of
that, and even if a short term relapse does unfold, it probably wont change the longer term
dynamics provided we don’t get a move back below that 88.25 level. I will of course be
watching all this very closely in the weeks ahead and keep you posted if anything of
fundamental significance does emerge to potentially derail the cycle.
Key data events due this week.
29/10- 12.00pm onwards-UK Autumn statement and Budget
30/10- 10.00am- Eurozone final Q3 GDP revision
31/10- 12.00am (Approx) BOJ Policy decision
31/10- 10.00am Eurozone October CPI report
01/11- 12.00pm UK BOE policy Decision and 12.30pm Quarterly inflation report.
02/11- 12.30pm US October Unemployment report