The USD$ Will Drive the Markets Higher

The fate of the U.S. dollar will determine which direction rates go and rates will determine the direction of the stock market. It’s just that simple. The dollar has been driving the developed world’s capital markets since the summer of 2008, and it is the dollar that will determine the fate of those markets this year.

It is my humble opinion that the dollar is oversold and that it is definitely not worthy of a 74.5 reading on the U.S. Dollar Index.

The dollar has taken a terrible beating the last 12 months [see chart] and I believe the dollar’s true value against the world’s strongest currencies should be 10% higher; at least to the 82 to 85 levels.

The last retracement high for the dollar was set back in January of 2009. As long as the index holds above the lows set just last month at 74.5 we should see continued upward momentum.

The 2009 selloff went too far, too quickly. As in all oversold situations I believe we will see traders repositioning themselves on the long side of the dollar. This rising dollar will exert downward pressure on interest rates as it attracts global money flows into the U.S. debt markets and that will prove good for the stock market and negatively affect gold.