Understanding the US dollar Index

“Paper money eventually returns to its intrinsic value ---- zero.” Voltaire

I am always amazed at how people confuse the dollar index with the dollar's purchasing power. You will often hear on CNBC or Bloomberg that the dollar increased or decreased against the Euro,Yen,Pound, etc on any given day. Recently the dollar index has strengthened considerably from 74 to 81 indicating that it is increasing in value. This is terribly misleading because the dollar index only tracks how well the dollar is doing against other fiat currencies. Fiat currencies by their own definition lose value every year (in the US is is usually 3-5%). So when market pundits discuss the strong dollar and so forth and how this is great-- don't believe them. Instead focus on the dollar's purchasing power. You can do this by comparing the dollar to the price of food, energy, gold, etc. When you do this, you can clearly see that the dollar is not increasing in value at all. In fact the direction has been definitively down for the dollar.

Dollar vs. gold

Dollar vs. copper

Dollar vs. oil

The only reason I did not show 10 year charts is because it is even more depressing that the 1 year charts.

Black Swan Insights


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