Eoin Treacy's view It has been more than a decade since one could make a credible argument for why the US Dollar should outeperform beyond short-term oscillations. In the meantime commodity and high growth Asian currencies had the most compelling bullish cases with a number more than doubling against the US Dollar in the decade from 2000. The strength of these currencies made for a compelling investment case since global investors had the potential to reap profits from currency gains and capital appreciation. A great deal has changed in the last year.

Both Europe and Japan can not tolerate strong currencies at present for their own individual reasons. More importantly, this situaiton is unilkely to change anytime soon. Ccommodity related economies were able to tolerate strong currencies and the loss of competitive in their domestic economies as long as commodity investment and prices were trending higher. The decline in industrial metal prices has highlighted the risk of relying on a commodity boom, Australia in particular is seeking to explore alternative growth sectors and weakening the Aussie Dollar has been a key policy initiative. Japan's devaluation has unleashed a chain reaction of efforts by its regional competitors to devalue their currencies suggesting that at the very least the pace of their currency appreication is likely to be considerably more volatile in future than its has been over the last 13 years.

From the perspective of the US Dollar, the economic recovery, albeit modest to date, is attractive on a relative basis. The prospect of tapering and the eventual removal of quantitative easing also raises the prospect of interest rate differentials widening in favour of the Dollar over the medium term. This is at least partially reflected in the performance of the US Dollar Index which has rallied impressively over the last month to test the 85 area. While some consolidation of recent gains is possible, a sustained move below the 200-day MA would be required to question medium-term scope for continued higher to lateral ranging.

In an effort to highlight the impact of currency differentials I used the Chart Library's Performance Filter to create a table of global stock market indices ranked by 6-month performance. I then added an additional filter and redenominated the list to US Dollars.

African and Middle Eastern markets are notable for their relative strength, not least because they have not been subjected to the same speculative flows as other markets and a number have pegs to the US Dollar.

The movement of the Japanese Topix Index from close to the top of the local curency table to further down on the US Dollar table highlights the need to hedge currency risk when investing in the potential for Japan's revival.

The performance of the USA's Russell 2000 Index of small to mid caps is particualrly noteworthy. The Index posted a tight consolidation between May and last week, which at least partially unwound the overbought condition relative to the 200-day MA. It broke out to new all-time highs today and a sustained move below the MA, currently near 900, would be required to question medium-term scope for continued upside. In tandem with the outperformance of the banking sector, this can be seen as a bullish factor for Wall Street over the medium term despite short-term potential for additional ranging.