NBA player likely won’t remain at the top of
the basketball world forever. At some point,
age will take over and his dominance on the
court will become legend. But until then, he’ll
keep fighting to maintain his top-ranking
status. There’s a corollary here to the U.S.
dollar, which has been the world’s dominant
reserve currency since 1921. After 96 years on
top, some analysts think it’s getting up there
in age. And may need to be benched.
No currency has maintained its reserve
status forever. The record is 110 years, which
was held by Spain (1530–1640). On the other
hand, what’s to say the dollar can’t break that?
The future is naturally a rumor, and no one
can offer predictions with any certainty. But
the dollar’s potential decline is a great story
for the press. You’ll routinely hear all kinds of
speculation about the reason for the dollar’s
tensions, to nations moving
to settle trades in native cur-
rencies, to other currencies
growing stronger. These ideas
will keep non-traders wring-
ing their hands for a while.
But your trader status means you don’t just
focus on the news. As a matter of course, you
work to understand the relationship between
the dollar and other markets. This helps you
gauge when the dollar’s in trouble, which
markets might be affected, and how that
impacts what you trade.
FIRST THINGS FIRST
You’re likely not going to wake up one
morning to find the dollar has been replaced. If that were to happen, it would be
a gradual process. And its successor will
become clear slowly—whether it’s one
currency, a basket of currencies, or a basket
Hypothetically, what if the markets were
to move away from a dollar-denominated
world? How would this affect the price of international commodities like gold, oil, or the
softs, where the dollar is the standard unit of
currency? What if Russia were to make the
ruble a dominant currency? How would that
shape trades for natural gas?
Here’s the thing: if countries start to “
de-peg” from the dollar (not have their currency’s exchange rate tied to the U. S. dollar), it
could certainly impact the value of the dollar as a reserve currency. But nobody knows
how much that value is. And the de-peg may
or may not put pressure on the dollar’s price
relative to other currencies.
WHAT ABOU T VOL?
Volatility (“vol”) comes and goes constant-
ly. If you think the dollar is making subtle
moves that suggest it might lose its reserve
status, consider adding commodity futures
correlated to the dollar—gold, oil, or softs—as
the price of these products will be impacted.
But keep in mind that pricing in U.S. dollars
is merely a receipt for a transaction. For
example, oil has the same value all over the
world, but in each nation, it’s priced in its
local currency. Even if changes in the dollar
impact the margins of local producers or
consumers, the “real” value of oil doesn’t
change. If the dollar becomes weaker, a par-
ticular commodity’s price could move lower
or higher in local markets.
But this can’t be predicted, and it doesn’t
matter where oil is priced. What matters is
there's liquidity and it can be traded. If the
dollar gets “fired,” vol for commodities will
likely increase. And there are different ways
to measure vol. For instance, you could add
the ImpVolatility study to the /CL chart.
Another vol measure for crude is the OVX—
the CBOE Crude Oil ETF Volatility Index.
Based on past news events, take a look at
how these indicators moved up and down
within a range. If vol spikes without a correspondingly large news event, and stays high,
something else could be brewing. Vol telegraphs market uncertainty, and that’s when
traders pay attention to risk. But there’s
often more to it than a vol spike.
FIGURE 1: Check the curve. The spread between the spot and future price in
crude oil is rising faster in the nearer months. Notice how the curve flattens as
contracts move farther out in time. Source: thinkorswim® from TD Ameritrade. For illustrative
FIGURE 2: Analyzing calendar spreads. In just four steps you can go from stock
symbol to trading a calendar spread.
Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.