Part II. Dollar Index – continued…

Pipruit: Sir, that’s very interesting about the Index dollar and all this stuff, but keeping in mind all things that we’ve discussed in recent time – I mean fundamental analysis, carry and index, I’ve come to some conclusion...​

Pipruit: Well, my theory has three phases and is based on some thoughts about investors behavior in different situations. The first phase is a dollar growth (and USDX, I suppose), that is based on risk aversion. You’ve said once, that the USD is one of the safe havens, so when problems have started – investors start to buy dollars to get return OF the investments rather than return ON the investments. This capital flow then forces the USD to rise.

When this overflow comes to an end and all who wants to buy US Dollars have done this – Then the second stage comes. This stage is dollar decreasing, since the economy falls into recession.

The third stage comes when the US economy starts to grow and gradually leave recession and turns to growth. At that stage investors reduce their risk aversion, take it more and start to invest money in US assets. This increase demand for US Dollars and forces USD to rise. A bit later Fed starts to to raise rates and that also supports the dollar’s growth.

What do you think about this stuff?
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Pipruit: Are you kidding?​

Pipruit: Why?​

Pipruit: Looks funny.

Commander in Pips: Thanks, but theory is quite serious and you’ve understand it quite right. Let’s pass through it again:

Phase 1 – Risk aversion boost

Economy starts to show the first warning signs of potential serious problems. Investors become worried and with that start to move their assets into safe-haven currencies. Initially it develops slowly but then faster and faster. In a row with USD – CHF and JPY also could start to rise. Since they think that the current situation in the economy is unstable or even on the edge – they prefer to get return “of investments” at all, rather than to get return “on the investments”. Durung such stages of the economy, the major task is to save what you have, rather than to earn more. Due to thess reasons the dollar starts to appreciate and it rate is growing.

Phase 2 – Weak economy of recession

When the rush gradually calms down, the economy gives clear signals of slowdown or even recession, The Fed starts to decrease interest rates, the dollar starts to fall. Demand for the greenback is weak.