Last week I wrote about the recent weakness in gold. So this week I was a little surprised to see an advertisement advising people to buy gold because it is up 30% for the year and should continue to go up because of a weak U.S. dollar. Gold is actually down about 11% since the beginning of the year and about 25% from its peak in March.

The information about weakness in the dollar was equally wrong. Over the past few weeks, the dollar is actually showing quite a bit of strength. Below is a chart that shows how the U.S. dollar (black line) has fared over the past six months compared to some other currencies. As you can see, over the past three months, the dollar has gained 15%.

 
Compare that to the Mexican peso (maroon line), the British pound (blue line) or the Euro (gold line). Over the same time span, these currency funds have declined from 18% to 42%. In recent weeks the only currency other than the dollar with a positive return is the Japanese yen. It is up 5%, but has weakened considerably in the past couple of weeks.

The middle section of the chart is a moving average convergence divergence (MACD) of the dollar. It remains positive, although it is indicating that the dollar might see more consolidation over the near term. The bottom portion of the chart is a relative strength index (RSI). It is trending solidly above the 50 level that indicates positive strength and momentum.

As long as this global economic crises continues, the U.S. dollar is likely to remain the top performing currency, because it will be in high demand. In spite of Europe’s attempt to make the euro the worldwide currency of choice, the dollar retains that position. During tough economic times, people worldwide try to hoard as many dollars as possible, because they know the U.S. will do whatever it can to maintain the dollar’s value.

In 1990, I was in the Soviet Union negotiating a contract to lease a cruise ship for a season. The communist government was still in control of pretty much everything, including the shipping company. We reached an agreement on price, the only catch was that money for the ship had to be paid in hard currency U.S. dollars. The irony of the situation was that at the time, it was illegal for someone to pay for any goods or services in the Soviet Union with anything other than rubles.

But communist officials knew their days were numbered. The best chance for their economic survival as individuals and as a country was to get hold of as much American cash as possible. For several years after, as the value of the Russian ruble collapsed, the unofficial currency of Eastern Europe was the U.S. dollar. I visited Russian banks that had no rubles to distribute, but had a back room with tables covered in stacks of U.S. currency.

Most of the world’s developed economies are dependent on spending by American consumers. Now with Americans cutting back on their worldwide purchases, there won’t be as many dollars floating around and the demand for them will increase. As a result, the dollar should remain strong as long as this situation remains critical.
F.S.