Real Dollar Index

By Bob Carver (, 18 October 2006

The much-maligned currency is forming a bottom in what has become a five-year bear market. The last time the US Dollar formed a long term bottom, in 1995, its rise not only helped lower inflation, but it attracted massive amounts of investment cash into US stocks and bonds. The following chart shows the “real” Dollar Index, not the one you’ll see on quote screens. The one that’s quoted is actually a frozen-in-time snapshot of the ‘Fifties trade-weighted US Dollar against a basket of foreign currencies, mainly the Euro and the Yen. It doesn’t reflect the current trade-weighted value of the US Dollar, what we call the Real Dollar Index, which is kept by the US Federal Reserve. The Real Dollar Index does mimic its “frozen” counterpart to some degree, however, and a bottom in one will likely also be a bottom in the other:

According to the resistance polytrendline overhead, the US Dollar is forming a low in the current timeframe and will be rising for several years in the future. This will create a situation very similar to the last half of the ‘Nineties. During that previous time period, foreign investors found 60% per year returns by simply investing in the US stock market. That’s because, in addition to the 30% per year return from stocks, the Dollar Index was appreciating at about the same rate. This, obviously, was one reason why the US stock market became a Bubble market: too many dollars chasing too few stocks. But, according to what we’re seeing here, a replay of the ‘Nineties is ahead.