Key Reasons to Be a Dollar Bull

Includes: DRR, FXE, UDN, UUP
by: Bruce Vanderveen

Bailout news and fear of a growing money supply drives the dollar lower and real assets, such as precious metals and oil, higher. Talk of a bust in treasury markets, and coming inflation, is rampant. It certainly is possible that inflation may resurface at some time in the future, driving the dollar lower. That, however, is not the current reality. Since mid December the dollar has steadily tracked higher, Click here to see the chart of UUP (the US dollar bullish ETF). Following are reasons to be bullish on the dollar:

Deflation Despite dire predictions of hyper-inflation due to bailouts and other rescue attempts, that is not happening now. Prices of most assets continue to decline, real estate, commodities, autos, consumer goods etc. Yes, the US government could print lots of money, but there are many constraints. Congress, foreign (Chinese) treasury redemption concerns and popular opinion are but a few. Washington cannot and will not pay off everyone's bad debts, they can't afford it. It will be interesting to see the congressional reaction when the US automakers show up in a month or two asking for more money, as they most surely will.

Least ugly belle at the ball It is true the US has major economic problems. Worldwide, however, the situation is even worse. The perception is that the US led the world into the recession and now will lead the world out. Unrest in Greece may be just a harbinger of things to come. Excepting the Japanese Yen, the US Dollar is among the strongest worldwide.

Euro problems The European union (and the Euro) have problems with the PIGS (Portugal, Italy, Greece and Spain) who are in a weaker situation than the Germans and the Dutch. Eastern European members are hurting badly. There is some question as to if the Euro can survive this crisis.

US Bailouts stalling Washington is running out of the will to do bailouts. Even now, Obama's stimulus bill is running into strong headwinds in a squabbling congress. Something will probably be passed, but government wheels turn slow, and it will be too little, too late, for many companies. Without bailout money bankruptcies will rise, weeding out the inefficient. This is bullish for the dollar and best for the US in the long run.

Deleveraging Global deleveraging of dollar-based credit is sending dollars back to the US.

In order to resolve the economic crisis Washington has to pick between two extremes. The US government can monetize the debt (The Zimbabwe Solution) or take a path such as the Japanese took in the 1990s, keeping zombie corporations and banks alive (The Japanese Solution). My guess is we will be closer to the Japanese solution than the Zimbabwe solution and the dollar will continue to strengthen.

Disclosures: Long UUP and DRR.