Is the Dollar Rally Over Now?

I was surprised by the comments of a man I think is an intelligent and savvy investor. Hugh Hendry, the contrarian British investor said yesterday that "I can`t buy enough dollars" when citing his dollar bullishness. This comment caught my eye. He is not only bullish on the dollar but shorting precious metals, "Gold, silver, I'm shorting them right now. (Inflation) is coming back in the future. All I'm saying it is just an unprofitable proposition at the time".

That completely contradicts my views on the dollar. I agree with Peter Schiff when he says that the US Dollar is a subprime currency and with Jim Rogers's bearish comments on the dollar, referring to it as a terribly flawed currency.

All these Government efforts to sort this financial and economic crisis will only fuel inflation. That will be the only effects of the Stimulus Package and all the TALF`s, TARP`s and banking rescue plans.

The only viable solution for paying back the US debt is to monetize it. In other words, pay it back in worthless dollars. The printing presses are already running at full speed and that will be seen in the value of the dollar in the near future. More dollars chasing the same goods and services can only result in a depreciation of the dollar's purchasing power.

How can we profit from this? Almost all governments around the world are following similar policies to a certain extent, but currencies like the Swiss Franc should do much better than the US Dollar. Another alternative is to buy hard assets as silver or industrial commodities. Marc Faber recently said that industrial commodities are very cheap. Things like copper or zinc might also be an interesting investment going forward.

I think the dollar will make news lows against other major currencies in 2010. When will the dollar bear market begin? I don`t know, but if had a gun pointed to my head I would say in the near future it has not yet started.

Disclosure: Long SLV.

Comments

[Marc Chandler:]

Perhaps the Fed and Tsy programs will lead to inflation, but the more pressing issue is deflation. Moreover, Europe has done much less than the US and yet the market, judging by the 5-year/5-year forwards are anticipating nearly twice the inflation in the euro-zone than the US and even more in the UK.

Yes there may a longer term inflation risk, but it still seems that policy makers here and abroad are still erring on the side of too little rather than too much.

I personally woulde find such doom and gloom views more compelling if there was some analysis of the other side of the equation. The US has its problems, no doubt, but the dollar's performance is a function of relative considerations. The dollar vs the euro or the dollar vs the yen. Indeed I would and have argued that the US may be one of the few countries that emerges from the crisis stronger than we went into it. We will get what we were told we had--transparancy, true markets (cf auction rate bonds), disintermediation, and many rivals, like Russia will see their ability to project power limited. And, lastly, the crisis, reveals fractures in the very foundation of the euro project and fewer will argue the euro is about to eclipse the dollar as the major reserve asset.

Mar 12 06:57 AM

[wes mantooth:]

"I agree with Peter Schiff when he says that the US Dollar is a subprime currency"


And that is why Peter's advice has been catastrophic since this crisis started. I know it's popular to bash the dollar and I agree that it will fall over time but what's it going to fall against short term? This has been a losing trade since this crash began. Plenty more deleveraging left to unwind especially with unemployment picking up.

Mar 12 07:07 AM

[Cinquero:]

My stance on all of this:

many argue that the EURO has problems. That may be true, but these problems have a chance to get solved because the whole world is talking about them. That is in stark contrast to the US. Nobody thinks the US has fractures. The US people are not even aware that the only thing that holds together the USA is greed and ignorance.

Germany and France have great and stable economic policies. There is much more reason to believe that the US will break up. From my point of view, the fall of the US economy is tightly bound to the oil price and peak oil: oil price and oil burden will go back when US GDP goes down. Otherwise, rising oil price will prevent US GDP growth to some extent.

Many US citizens are already acquiring EU memberships. That will drive house prices in the US down and (maybe) up in Berlin, Germany, where house prices have fallen for a decade now because of eliminated subsidies to eliminate current accounts deficits.

Mar 12 08:23 AM

[Cesato:]

In my view it was over since January, I don't think that USD weakness will be the result of either European or Asian economies outperforming the American economy, I believe the US goverment will trigger the USD sell-off to a levels around USD 1.40/1.50, EUR/USD wise.

Mar 12 08:28 AM

[y3115y:]

Agree with you.

Mar 12 08:30 AM

[kelm:]

A much lower dollar is one of those tectonic changes that many can see coming but the timing is tricky enough that it is easy to trade very badly waiting for it to come. The dollar, despite all of the negatives in the world and the "flight to quality" is substantially lower today on a trade weighted basis than it was some years ago. That says to me that diversification away from the dollar has been happening. As for the current strength it will end at some point and, I believe, the dollar will drop off a cliff. But, like T-bonds, it is taking its merry time about it.

Mar 12 08:34 AM

[yellowhoard:]

Too much global political risk to play the short dollar trade. We all know that, given years, the dollar will crash. However, what happens to your short dollar bet if unexpected black swans start to destabilize other parts of the world and panicked investors run to the dollar.

It takes some big cajones to go long the buck right here, but I wouldn't short it either. Too many other places to make money right now without having to keep up with what's going on in Poland or Rumania.

Mar 12 08:56 AM

[wes mantooth:]

"The US people are not even aware that the only thing that holds together the USA is greed and ignorance."

"Many US citizens are already acquiring EU memberships. That will drive house prices in the US down and (maybe) up in Berlin, Germany, where house prices have fallen for a decade now because of eliminated subsidies to eliminate current accounts deficits."


Cinquero- These are contradictory statements. If they are not aware, why are they acquiring EU memberships?

Mar 12 09:16 AM

[Mongoose:]

I fail to see a real value to any of the currencies. It seems to only be a relative comparison of one to another.??????????????... Help.JR

Mar 12 09:17 AM

[Janne Bubbla:]

Hugh Hendry is great, but you have to remember that he told Potash would go to 2000 CAD when it was at 250 last summer. So he can change his mind quickly. Not that there's anything wrong with that.

I saw the clip with him debating Liam Halligan on CNBC and they both seemd to claim they were contrarian. I think the word "contrarian" has lost its meaning altogether. Everyone is contrarian today, which of course is ludicrous.

I think you only can use the word contrarian meaningfully in a siutation where almost everybody thinks one thing. That is not the case today with the stock market, the bond market, precious metals, currencies etc. There is no contrarian trade in any of these markets since there are a lot of different opinions about where these markets will go. Often in the same person too.

Mar 12 09:32 AM

[Uppai Mappla:]

US Dollar could fall as soon as the Chinese have quietly and slowly offloaded their US tresasuries to buy commodities (Russian oil, Rio Tinto), gold etc. Till they are finished they will continue saying things like "We hate you Americans but there's nothing we can do about it", "dollar will continue be the reserve currency" etc.

Once again, the world will be caught unawares and that should lead to a new economic order. America would remain for decades like Japan, but its immigrant population might pull it up eventually.

Mar 12 11:59 AM

[Undertaker:]

I have been following Hugh's comments for quite some time, not necessarily his recommendations. For instance he claimed in 2005 when the Nikkei stood at around 15.000 that he would wait for it to drop back to 12.000 before it would go back to 40.000 by 2015 to break its 1989 high (he thinks in generational 25 year cycles). Maybe so and he will be proven right, but today the Nikkei is at around 7.000 so if you are a long term investor and followed his recommendation it would have cost you almost 50% in nominal value, unless you can sit it out until at least 2015. Hugh sometimes sounds contradictory or paradoxical as he expresses a long term vision, but essentially he is a here-and-now investor, so what he says is one thing what he does another. He also said that he feels many in the investment community have jumped to the last page of a novel that offers an exciting journey with regards to the financial meltdown and the effects on asset classes. He claims there is too much noise on gold (over)appreciation and dollar collapse, but we are not quite there yet. In the meantime it feels lonely to be investing into US Dollars right now and that is why Hugh thinks the US currency offers an attractive proposition in the short to medium term.

Mar 12 12:19 PM

[Buckoux:]

That the US Dollar is a sub-prime currency is because the Federal Reserve kept lowering its value by lowering the interest rate in order to support, ironically, the sub-prime lending and securities bubble. When Wall St. and the Fed begin to look upon the "Almighty Dollar" as a valuable national resource, just as OPEC nations view their oil production, America will be prosperous once again. Shorting the Dollar is the equivalent of sterilizing ones offspring.

Mar 12 12:45 PM

[AndrewBaker:]

The dollar is doing well now for the same reason the yen did previously: when markets are down everywhere, people repatriate their cash to their home country: you're safer with the devil you know.

In time, and especially after "quantititive easing" (printing funny money to you and I), the dollar will fall, and substantially so. Look at the yen now.

For now, I'm happy with dollar investments, but at the time I deem right - and we'll all have our views on timing - I'll be looking to invest in stocks and commodities priced in other currencies, whatever they will be.

Mar 12 02:01 PM

[dtblount:]

I agree with Jim Rogers...but only to a certain degree. Granted, his net worth and resume do a solid job of legitimizing his views, but I don't agree with him selling ALL of his USD over the next years. While it is a bit extreme, I agree that the USD is a flawed currency...but it tends to be the best of the worst more times than not.

In the short term (3-6 months), I'm betting on a continued strong USD, especially vs EUR, GBP, CHF, and JPY as they approach ZIRP and USD further emerges as a safe haven. In the long term (6-18 months), I like CAD, AUD, NZD, BRL, and ZAR (although the upcoming elections could convince me otherwise...but I'm very optimistic about Zuma). I believe the recovery will come out of China, followed by the US...with inflation chasing behind. Commodities, as well as commodity-based currencies, will do extremely well.

Cinquero,

Thank you for the ridiculous analysis and rationale. You are attempting to throw opinions into an argument needing facts.

I especially like your view that housing in Berlin, specifically, will boom...because "many US citizens are already acquiring EU citizenship" ...excellent logic.


Cheers

Mar 12 03:34 PM

[JCC:]

On Mar 12 11:59 AM Uppai Mappla wrote:

> US Dollar could fall as soon as the Chinese have quietly and slowly offloaded their US tresasuries to buy commodities (Russian oil, Rio Tinto), gold etc. Till they are finished they will continue saying things like "We hate you Americans but there's nothing we can do about it", "dollar will continue be the reserve currency" etc.<br/>

You have a point, however, the Chinese will only offload the dollar when it is to their advantage, and that will probably be many years away. With the Euro being a FIAT currency, and the dollar being a safehaven, it should stay strong for a long time.

Mar 12 05:22 PM

[IronMeteor:]

You say -

"More dollars chasing the same goods and services can only result in a depreciation of the dollar's purchasing power"

I agree - But where are these mystical dollars.
I don't have more dollars, none of my friends have more dollars. Maybe my bank has more dollars, but I doubt it since they just cut my credit card limit and won't let me access my Home equity line anymore.

So lets not confuse dogma with facts. The facts don't support inflation at all. Not this year at least. When I do get some extra dollars, I doubt I will chase Big Macs higher, more likely I will just pay off my debts.

Is paying off debt inflationary? I doubt it.

Mar 12 06:30 PM

[zepheri:]

Paying off debt is very inflationary. In order to pay off debt you must have debt. Debt is the creation of money. You are paying back more than you actually needed which makes even more money albeit less for you and yours. Maybe you should be at a 2nd or 3rd job creating more money to feed the need.


On Mar 12 06:30 PM IronMeteor wrote:

> You say -
>
> "More dollars chasing the same goods and services can only result
> in a depreciation of the dollar's purchasing power"
>
> I agree - But where are these mystical dollars.
> I don't have more dollars, none of my friends have more dollars.
> Maybe my bank has more dollars, but I doubt it since they just cut
> my credit card limit and won't let me access my Home equity line
> anymore.
>
> So lets not confuse dogma with facts. The facts don't support inflation
> at all. Not this year at least. When I do get some extra dollars,
> I doubt I will chase Big Macs higher, more likely I will just pay
> off my debts.
>
> Is paying off debt inflationary? I doubt it.
>

Mar 12 07:49 PM

[LJR:]

I left the U.S. fifteen years ago when the Dow Jones was between 3000 and 3500, with a nest egg, which at times I wished I had invested in a broader index system to watch my investment grow. But now it has gone south quite a bit, so I'm feeling better. My investment is in my own business and I can choose how much I charge for services as prices fluctuate, within market parameters, of course. Meanwhile paying off the little debt I owe and saving a bit, and now on an alternative energy kick to try to reduce my small overhead even more.

Sort of survivalist, I guess, but with much contentment too.

My feeling about the dollar is that it will go back down, and possibly quite suddenly. How can it be worth so much when the U.S. debt level is so high? I get the feeling too that no currency will be worth much in the future, but that is just a feeling - part of my survivalist thinking.

Mar 12 08:28 PM

[Vuke:]

Hugh Hendry may well be right in shorting silver to buy the dollar today. On the other hand one could take a longer term look at the relationship.

The dollar has steadily lost some 97% of its purchasing power in the last 100 years. Nearly the same percentage of the world's stock of silver has disappeared in that same period. Sooner or later these trend lines will seriously conflict.

Whether or not the megalithic stimulus packages world-wide will accelerate either trend we cannot be sure but it does appear likely silver will become far more valuable in the future than it is today. That may well happen the day Mr. Hendry has to cover his shorts.

Mar 12 10:34 PM

[ManAboutDallas:]

Mr Hendry's remark... "I can't get enough dollars" is a good example of why English is a language one must approach with trepidation in trying to find the hidden meaning, and why what ISN'T said is more important sometimes than what IS said. So, Mr Hendry "... can't get enough dollars"? Notice how he DIDN'T say "... I WANT enough dollars".

If Mr Hendry's house were on fire, he'd be saying "... I can't get enough water". That doesn't mean he WANTS the water... just that it's the ONE THING he happens to NEED the most - AT THAT MOMENT.

Mar 13 01:01 AM

[Charlie Bottle:]

Completely off the mark and asleep at the wheel.

The dollar should appreatiate vis-a-vis the Euro and swiss francs in the 6-9 months ahead as eastern european corporates and then households default massivelly and bring down western european (including swiss banks) and sovereigns (more sepcifically the PIIGS) with them.

You should pay attention to what Marc Faber (a swiss national himslef) thinks about the soundness of swiss monetary policies.

Mar 17 01:01 AM

[Gregor Macd...:]

Oops. Nothing short of hilarious to hear all the trend-following chatter from the Dollar bulls in this comment thread, just 24-72 hours before the USD got mugged by the FED.

Mar 20 03:36 PM