Is Obama Dollar rally stretched – historical cycle context

After sharp rise during the financial crisis, introduction of monetary easing in US, led to drop of Dollar as well as interest rates. While interest rates have just started edging up from last year or so and FED only hiked once last month of 25 basis points, Dollar has been gaining in strength since 2011, when Euro Zone debt crisis rattled markets.

So, the question we ask:

After rising for more than four years, is the Obama Dollar rally overstretched?

We based our analysis on broad based Trade weighted US Dollar index. And historical analysis says, Dollar rally might still have room for further rally. Historical super-cycles of Dollar have been lengthier and intensive.

Previous two Dollar rallies were, Reagan Dollar Rally and Clinton Dollar Rally.

Reagan Dollar Rally, named after then US President Ronald Reagan, began late 1978 and lasted for 6.2 years, ending only in early 1985, with help of Plaza Accord. Broad based Dollar index gained as much as 49% in this period.

Clinton Dollar Rally, named after then president Bill Clinton began in mid-1995 and lasted for 6.8 years and ending only in early 2002. Broad based US Dollar index rose as much as 33% during this period.

Compared to these two cycles, current rally is relatively young (4.2 years) and less intense (Dollar has gained 20% so far).

In current fundamental context in global economy such as weakness in Chinese economy, continued monetary policy divergence and emerging market over-leverage, Dollar might gain further.

However technical pattern, a downward sloping trend line from previous two, Dollar super-cycles peaks, posing challenge to Dollar's further advance.

In this historical analysis, there are some other key points to note -

Dollar's rise has historically coincided or led to currency crisis in different parts of the world.

• Reagan Dollar rally has coincided with Latin American debt and currency crisis and two recessions in US.
• Clinton Dollar rally has coincided with Asian currency crisis, Russian debt crisis, dot com bubble burst and one recession in US.
• Obama Dollar rally has so far only led to Taper tantrum in emerging markets and commodities price drop.