I am sharing a note from this Weeks ''Indiacharts Insiders'' weekly Nifty commentary, as it was interesting and insightful and raises some important questions about the dollar.

Dollar Index

I am sorry if I have had to flip flop on the dollar index so many times but I am keeping both alternates open and will change with momentum indicators as both are valid. Weekly momentum which was in sell mode moved back to buy mode last week itself and last week I wrote about watching the 61.8% mark which was surpassed. We also closed above the weekly Bollinger bands. So I Go back to watching this chart of the Dollar index that I put out twice in the last 3 months to highlight what happened in the 1990s and how the situation today could be a mirror image.

In the case above the dollar goes up like it did in the 1990s because the US starts raising interest rates. However the late 1998-2000 rate hikes by Alan Greenspan were in the midst of what he called ''irrational exuberance'', They wanted the bubble to cool off a bit. But there are no such statements today as no one wants to pop the bond markets. Still we hear a lot about higher rates coming that is driving up the dollar way in advance of any actual action. The market is doing the rate hike irrespective. During the previous period when the dollar consolidated in 1998-99 Gold Bottomed and then formed a double bottom into the 2001 dollar peak.

What has me more on the Bear case for the Dollar is that recently not just Gold but other commodities including Agro commodities are ticking up again so is it ''Welcome to Inflation''? This remains tricky. I expected that this time rising prices will actually see inflation rear its head and become the reason for the FED to raise rates. But rising inflation levels could mean a falling dollar and not a rising dollar. So these two trends remain conflicting ones for now and I am watching them closely. For those making fundamental arguments for Commodities it is quite clear that commodity trends are not driven solely by consumption demand but investment demand as well that can always skew this argument either way.

On the chart above note the blue line of the highs. It could prove a top for the dollar and a Break out point for a new bull run in the Dollar. Many fundamental arguments are out there for the dollar to rise but sometimes Dollar bulls can simply extrapolate the past into the future. I hear that the world is holding dollars that will go back to the US. But most dollars with Central banks are invested in US bonds. Today's world of currencies are driven not by fundamental arguments but by money flow. Money flows into US assets or World assets or commodities and currencies reflect that movement. A rising dollar was about money going into US Real Estate Bonds and Equities as a safe haven play. So if interest rates rise either due to inflation or the FEDs insistence, it means lower bond prices and I do not know how that is good for the dollar. If all the money in the world has been buying US bonds and real estate and starts to lose money how long will they hold. The dollar cannot stay strong. So in my head there is risk to the Long dollar trade from a US perspective going forward. In fact we may now be seeing the greatest decoupling of currency movements after what was the strong correlation between USD pairs during 2014-2015. Look at each currency chart on its own merit from here one.

The day the FED hikes you might actually see the Dollar start to fall just like it did in Jan 2016. But the big question is what comes first, a fed rate hike, or inflation?