Don't Expect the Dollar to Repeat Its 2008 Performance

During 2008, one of the few financial instruments in the world that actually rose was the U.S. dollar. It became a great defensive play as investors ran back to the “world’s reserve currency”. Investors began to flee the emerging markets and repatriated their funds back into the U.S., which caused them to sell out of the foreign currencies and repurchase dollars.

Also, as stocks and commodities plummeted throughout the latter part of 2008, investors looked for any “beaten down” safe havens out there that they could run to. The dollar had been sold off for years back to back. So there were very few financial instruments beaten down like this one. (However, the Japanese yen was in the same shape also).

So for a combination of all of these reasons, the dollar was “propped up” during 2008.

However, the tide is beginning to turn against the buck once again for a couple of reasons.

Firstly, the Fed has finally beaten most other countries in their race to a zero interest rate policy (as it lowered to a “range” of 0% to 0.25%). Investors like to earn the highest yield possible (with the lowest amount of risk possible) on their investments.

Now that the U.S. dollar is weakening and coming back down AND it also carries a lower interest rate than before, it has further caused money to “flee” the greenback in search of “greener pastures”. Therefore, lately, money has been running away from the buck and back into “select” foreign currencies.

The Middle East prepares a plan to “rid itself” of the need for the U.S. dollar

So that was the first strike against the dollar. Now for the most recent strike against the dollar.

For many years now, the Arab nations have been considering “de-linking” their currencies from the U.S. dollar and forming their own version of the euro.

However, up until now, it’s been just a lot of hot air to say the least. Every year they mentioned the thought of going to a single currency and that’s about as far as it gets.

Well as of Tuesday, the Gulf Arab leaders came together and stated that they WILL put together a single currency for their region to use and de-link their pegs to the U.S. dollar.

They state that this will happen by 2010. That’s the part I disagree with. I think it will take them far more time to do this than they think at this point. It took Europe far longer to bring about the euro and I don’t think these guys can be much faster.

However, as far as the greenback is concerned, the negative sentiment has just deepened. Just knowing that these guys are preparing a plan right now to get rid of their peg to the U.S. dollar is all the excuse many investors will need to dump their dollars ahead of time.

Now there is more of an allure for other major foreign currencies once again due to this facet (among others).

Couple this with the recent stabilization of commodities that trade opposite the dollar (such as gold) and it gets even worse for the greenback.

So I don’t think you’re going to see the dollar repeat its success that it found in 2008. The dynamics that made it go up in 2008 are starting to erode way rather quickly.

Therefore, I believe that you will find the euro and the Aussie dollars to be some of the biggest beneficiaries of the coming “dollar selling”.

The euro Has begun its ascent

Comments

[SW Richmond:]

Actually, the GCC said their goal was to implement their currency in September '09:
archive.gulfnews.com/b...

'Saudi Arabia's King Abdullah Bin Abdul Aziz proposed that the committees working on the GCC economic integration process should speed up their work and complete the whole process by September 2009 so as to benefit GCC nationals.'

This seems rushed to me also, but these are not democracies after all, and maybe they know something we don't. Their haste does not add to my faith in our current situation. Also, this quote from an article at islambank adds to my dollar worries:

'Once established, the GCC leadership may decide to invoice their hydrocarbon sales in the new common currency, moving away from the current dollar pricing system.'

tyo.ca/islambank.commu...

Jan 01 08:11 AM

[Asbytec:]

Well, if the world switches to another currency, bring our dollars home and burn most of them. Let this new magical currency soar in value as they try to print enough to keep up with demand. That'll be fun.

And what about China in all this? What about the interest of other nations with huge dollar reserves? I am not up on the geopolitical ramifications of such a currency move, I guess they better get this past George Bush, Sr., first, eh? ;-P

Besides, the dollar flows up and down at the whims of the markets. It's the nature of the dollar beast. So, this "new" currency will have troubles from the onset: high valuation, probably higher oil costs, and some geopolitical resistance from some pretty powerful players.

This currency valuation is one reason the euro will not replace the dollar. The euro would soar through the roof and the EZ will run huge trade deficits. The other is EZ demographics.

Jan 01 09:02 AM

[InvestBaboo:]

Historically Dollar and Gold have had an inverse relationship (i.e., dollar moves up, gold moves down). Since we are talking here about the Gulf nations is there not a rumor that they are considerting significantly enhancing their Gold reserves as well as possibly use Gold as one of the elements in their currency basket? If true, this is the beginning of another major bull run in Gold and a major bear run in the Dollar.

Jan 01 10:49 AM

[secmaven:]

If Israel's attacks on Gaza continue the Muslim nations with the oil may just be able to overcome their differences and get serious about this proposal. Obama must bring about peace and a viable two nation solution to the Palestine conflict or he is toast. This is his first and most important test.

Jan 01 11:53 AM

[Greg Pinelli:]

IF..the Arab oil producing nations do anything it will be a subtle..but definite..move into gold..It's not impossible that a gold acked dinar could eventually develop..but what is the point of pegging one's resources to the Euro?
The Australian $ may well be an alternative to the US $...remember though that they are tied at the hip to China..and that market is up in the air..Bottom line..ALL PAPER CURRENCIES ARE AT RISK......

Jan 01 08:54 PM

[Greg Pinelli:]

You really must be joking! The Arab nations don't give a rats behind for the Palestinians...Saudi Arabia is concerned about Iran..and all the others only care about the price of oil...
President elect Obama needs to focus on internal fiscal matters and the US...the Palestinians wouldn't be in the mess they're in if they actually cared about peace and stopped acting as if the world should be outraged that murderous racists have problems.....


On Jan 01 11:53 AM secmaven wrote:

> If Israel's attacks on Gaza continue the Muslim nations with the
> oil may just be able to overcome their differences and get serious
> about this proposal. Obama must bring about peace and a viable
> two nation solution to the Palestine conflict or he is toast. This
> is his first and most important test.

Jan 01 08:58 PM

[Mowog:]

A relative in a senior position at a big Japanese electronics firm says they expect sales to continue declining until late 2009. I'm glad I have lots of yen now, but Japanese demographics and national debt are long-term disasters waiting to happen.

If Americans quit being "conspicuous consumers," Europe, Australia, and Canada will not likely pick up the slack. Export-based economies like China, Korea, and Japan will thus continue to suffer, as will the countries to which they've offshored low-skilled factories; e.g., Vietnam.

As for the Palestinians, no other Arabs want them; the Egyptians recently shot at them, too. The Palis are useful to rage against Israel and distract Arabs' attention from domestic problems. Do you recall the productive hi-tech hydroponic gardens the Israeli settlers left, the gardens the Palis promptly looted and turned back into useless desert? Palis are the UN's longest-term welfare recipients, with almost predictable results.

Jan 01 10:39 PM

[jepittman:]

Those suggesting a new currency from the middle east as a serious competitor to the US Dollar as a reserve currency are IMO not being realistic. The quantity of funds necessary for a reserve currency would dwarf the small economies of the middle east. The US Dollar will not be seriously threatened as the world's primary reserve currency for many years, despite the ridicule heaped on it by the gold community.

I respect gold as a hedge commodity and own it. Gold investors please keep in mind I am commenting on a new middle east currency as a viable global reserve currency, not being critical of gold as an investment.

Jan 04 11:26 PM

[FXedu:]

I agree. I wasn't referring to it being a "reserve currency" of the world either. Just that they were forming their own currency much like the euro zone has done and yet it's not the world's reserve currency either ...but yet does have its own currency for the region and that's what these guys say they are forming by late 2009 and another report mentions the start of 2010. Either way, I think they'll miss either target but still might make it happen as soon as they can.


On Jan 04 11:26 PM jepittman wrote:

> Those suggesting a new currency from the middle east as a serious
> competitor to the US Dollar as a reserve currency are IMO not being
> realistic. The quantity of funds necessary for a reserve currency
> would dwarf the small economies of the middle east. The US Dollar
> will not be seriously threatened as the world's primary reserve currency
> for many years, despite the ridicule heaped on it by the gold community.
>
>
> I respect gold as a hedge commodity and own it. Gold investors please
> keep in mind I am commenting on a new middle east currency as a viable
> global reserve currency, not being critical of gold as an investment.

Jan 05 02:33 PM