Is the U.S. Dollar Finished? 63 comments
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Since March, perhaps the most obvious trade has been to take the short side of the U.S. Dollar.
However, the easy money's been shorting the dollar, and the next round of easy money will be made where nobody else is looking: buying the U.S. Dollar. That’s because quite frankly, the dollar is oversold and everybody hates it.
In an almost lockstep countertrend with stocks, the dollar has been plummeting since March. When you couple the …
- Oversold nature of the greenback with the
- Extreme pessimism toward the currency
… You have a recipe for a sharp rally. A rally so strong that it should send the shorts running with their tails between their legs.
Just ask Aunt Wilma - everyone's proverbial aunt whose outlook on the market is consistently and without parallel when it comes to being wrong. She’s the aunt who wouldn't dare miss an episode of "Squawk Box," but hasn't a clue that IBM's ticker symbol really is "IBM." Everybody knows someone like this, and she's always on the wrong side of the market.
So... with Dollar Sentiment Index showing only 3% of traders bullish on the ole' greenback, rest assured Aunt Wilma thinks the dollar is still going down.
Now bear in mind that I think gold is in a secular bull market, which by correlation puts the U.S. Dollar in the "doomed" category. But understand this …
The Dollar's status as the world's reserve currency didn't appear overnight, and it won't vanish overnight, either.
Even in a roaring bear market in the Greenback, there will be times when the bears have their hind-parts handed to them.
Just like they did last December, as you can see here (click to enlarge) …
Now... to trade the dollar on the long side there are several things you can do.
- You can simply buy a fund like the Rydex Strengthening Dollar Fund (RYSBX) - which will perform twice as well as the Dollar, or
- You can simply buy the Dollar in the spot market if you're a Forex trader, or
- You could short Gold if you're feeling really brave (which I don't recommend, as that trade could go very wrong very quickly).
However …
Perhaps The Best Way To Profit From A Rising Dollar Is To Sell Stocks
It's no coincidence the peak in the Greenback back in March corresponded with the bottom in the S&P 500. There's a very real relationship - as with Gold - between stocks and the U.S. Dollar.
And with the S&P 500 as overbought as it was in October 2007 (we've had 6 consecutive up months), selling stocks stacks the odds in your favor by a landslide. That is what I told Market Trigger Alert readers to do last week, when we sold the S&P 500 E-mini.
I expect the see the S&P 500 well below 950, perhaps as soon as December. We're well positioned to profit off that fall... Are you?
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This article has 63 comments:
The dollar will drop in value but it will be SLOW and teady the way teh Chinese want it
Like it or not they control its value
A safe haven currency that is being shorted for the carry trade? A major shift is under way.
What we need is inflation not a deflation.
Maybe why gold hit its highs in the A.M. & fell back
As for the S&P we just had 3 targets 1100, 1150, 1200 today...
You can feel the raw emotional trading
I do agree with Richard here though that a fiat currency market is fundamentally different from an equities market, in that a currency being oversold could easily become self-fulfilling.
On Sep 08 04:14 PM Hot Richard wrote:
> I remember when Ford was oversold, so I loaded up and waited for
> Ford to go print off more cars and trucks. Wait...most companies
> don't work like that. So maybe I shouldn't be thinking only about
> a currency being "oversold". Yes, I believe I will continue shorting
> the dollar.
you could question if they even understand what reserve currency means in the context of the formal Bretton Woods breakdown in Aug 1971;
and then as noted above, we are fed the CS 2010 S&P forecast as well as a hedge fund shill and a brokerage president saying big numbers
it does make you wonder
On Sep 08 04:20 PM Dirtnap wrote:
> I admit that I don't know how this will all play out, but my expectation
> is that a minor collapse in the equities market will drive the dollar
> back up in the coming months.
>
> I do agree with Richard here though that a fiat currency market is
> fundamentally different from an equities market, in that a currency
> being oversold could easily become self-fulfilling.
Example 1:
Do you know Zimbabwe? There economy is in shambles and experiences hyperinflation. You can read about it in the WSJ. I think that most people would be bearish on the Zimbabwe dollar. So, according to the contrarians, you should buy Zimbabwe dollars, because "the Zimbabwe dollar is oversold and everybody hates it." DUH
Example 2:
Let's all go outside and watch a guy shake an apple tree. After a while, one of the apples seems to be shaken loose. What do most people expect to happen? Well, that the apple will fall to the ground? Contrarians would then argue: "buy the apple, 'cause it going up" DUH
The dollar will also move based on fundamentals. I believe the US dollar is fundamentally wounded because the US economy is fundamentally wounded. Things will not improve until the govt deficit, and the current acct and balance of payment deficits are tackled. There is a need to resolve the fundamental issues of an economy out of whack, with too much consumption, not enough investment or saving - the wrong signals are being given now in terms of the price of forward money because the printing press has created such high supply of currency. The article would be wrong on that acct. But we are also well aware of all these issues and the market reflects this.
The third reason why the dollar moves is to do with expectations. If the current issues are all factored in; then we should look at what to expect next. The American economy is the most powerful economy in the world (in spite of the stupidity of its bankers, financial industry and Bush's government) and will rev up again in spite of all the negativity currently being experienced. The question is when. If one believes that we have just gone past the bottom (look at production not employment numbers) and that governments will slowly start sopping up the excess currency, then the US dollar should start to recover.
I believe it is perfectly consistent to have higher growth relative to trading partners and a observing a strengthening of the currency (actually that is what the theory predicts). Overall, I think the article is right.
Agree, I am not sure what "oversell" means for currencies, when a Central Bank can print as much as it wants, inject liquidities and buy foreign reserves...
Short term, playing the strong dollar is highly correlated to a S&P sell-off; maybe it's a trade but a short term one, and purely a technical one.
Long term, Fundamentals will drive it where it was in the 70s...
On Sep 08 05:53 PM Dave Wrixon wrote:
> How can you oversell something that is becoming increasing worthless
> because people are beginning to understand that it was a Ponzi game
> all along?
Relax poor people, mininimum wage is going to be $20+/hr but your Happy Meal is going to cost over 10 bucks. Such is the wonders of inflation (frown).
I bet everybody was saying the same thing in the late 70s. But instead, we had slow and steady inflation throughout the 80s and 90s.
Sure, we've printed currency. But if the banks are hoarding it, it's never making it's way into the hands of the masses, and therefore, prices can not rise (inflation) if nobody has any money!
On Sep 08 03:02 PM Macro_Man wrote:
> Agreed, we are at or close to the bottom. Don't see DXY going below
> 76. I am long UUP with put protection.
On Sep 08 05:53 PM Dave Wrixon wrote:
> How can you oversell something that is becoming increasing worthless
> because people are beginning to understand that it was a Ponzi game
> all along?
On Sep 09 12:21 AM Paul H. M. wrote:
> Doom and gloom. Doom and gloom!
>
> I bet everybody was saying the same thing in the late 70s. But instead,
> we had slow and steady inflation throughout the 80s and 90s.
>
> Sure, we've printed currency. But if the banks are hoarding it, it's
> never making it's way into the hands of the masses, and therefore,
> prices can not rise (inflation) if nobody has any money!
So where is all this inflation going to come from in the near term? People need jobs, optimism and expendable income or at least a willingness to borrow. People just aren't buying those McMansions and boats and trophy crap like 3 years ago... And its not coming back any time soon.
Really, they will have to just cut checks for a few grand to every adult in US right before christmas if they want some real nice inflation to happen. Deflation is here. If china and other buyer's of US security instruments don't freak out... this recovery and all the happy inflation talk is a bunch of hoopla in my opinion. Maybe I just read too much Mish Shedlock.
You have NOT seen NOTHING Yet!
1. There is no indication as of yet that the contra-trend between the DX and the SPX will break. For now this is holding.
2. It is obvious to the extreme that the direction of the SPX is not based upon conviction. It is based upon manipulation.
3. If the SPX- DX relationship is a causal one, then this implies that the DX is also an indirect result of manipulation.
4. The key here is to determine when conviction will return, in one direction or the other.
5. I cannot see any fundamental reason why conviction for SPX should be positive. Hence the bias should be for a dollar upside in the near term.
The USD will lose its status as the reserve currency. It wont be overnight, but at this point it is inevitable. We no longer live in a world where the USA is the single largest economy, and it will never be again.
The dollar won't fall too far in the short term. Although the US would love to print their way out of debt, there is no way the chinese will let them devalue their currency that much. They hold alot of USD.
Kirk
Talk about devaluing something...
On Sep 09 02:44 AM herd mentality wrote:
> umm... i think we also need people working :) U6 + self employed
> people like realtors (who are not selling much) + college kids looking
> for that first real job = close to 20% ACTUAL unemployment. I don't
> care what U3 is... thats a shoddy indicator for unemployment. If
> we keep shedding jobs and those with jobs are taking pay cuts and
> being squeezed to work more... coupled with a new "frugality" mindset.
> How is our economy going to expand? Even if they print 10 trillion
> dollars. Who is borrowing it? Who is lending it. The money supply
> is expanding behind closed doors and filling up bank reserves. Banks
> are using it to get to proper ratios since they were all slicing
> and lending on so little actual reserves. Then factor in all the
> toxic assets being mopped up. Taxes have to keep inching up to pay
> for all this crazy deficit spending, bailouts, and neo socialist
> extravagance. So that puts more pressure on those with a job.<br/>
>
> So where is all this inflation going to come from in the near term?
> People need jobs, optimism and expendable income or at least a willingness
> to borrow. People just aren't buying those McMansions and boats
> and trophy crap like 3 years ago... And its not coming back any time
> soon.
>
> Really, they will have to just cut checks for a few grand to every
> adult in US right before christmas if they want some real nice inflation
> to happen. Deflation is here. If china and other buyer's of US
> security instruments don't freak out... this recovery and all the
> happy inflation talk is a bunch of hoopla in my opinion. Maybe I
> just read too much Mish Shedlock.
Subject: Please read this ; The Road to Socialism USA www.cpusa.org/article/.../
Please read this , and ask if America would have built all that we have consumed over the past 15 years of Tariff Free Imports , the very Tariffs that would have been paid to offset the losses to Medicare and Social Security , for the loss of wage deductions that by relocating jobs out of the USA has caused , which everyone keeps forgetting to talk about , that maybe we wouldn’t need Socialism ???
The High Cost of the China-WTO Deal
Administration’s own analysis suggests spiraling deficits, job losses
by Robert E. Scott www.epi.org/publicatio.../
Or was it all planned ??? This is extreme but the person writing this article needs to be interviewed on the Communist forum he said he attended talked about in this article and ask , Have the Democrats adopted a more Communist view of economics in America , and other social catagories ??????
I am with Glenn Beck on the fact that we the people need to Know what it is we are facing , if in fact we are seeing the Democrats trying to change America to a Communist state or not , and if this is the trend then we all need to Debate the pros and Cons of all systems , and how they benefit the majority , and not a idealogy that thinks they know what is best for society , is the debate I want to see in America .
I remember when the FTC would bust up the consolidation of a Corporate consolidation in the USA every now the then when they applied to take over a business , so that the MOM and POP stores would not be over ran , so that wealth redistribution was more equal , but ever scene the WTO and the Free Trade era of the 1994-5 , we been going down hill faster than the shuttle reentering earth atmosphere
I believe the Change of Tariff Law back in 1994-95 was the brining of this demise we see today , and the Giant Sucking Sound Ross Perot talked about in the 1992 Presidential Campaign , www.thenation.com/doc/... , has come home to roost , and its not just the USA its every country that cannot compete with the way that Asian Countries manipulate their currencies lower than the Trade partners that are Higher , which is a direct example of ” Gresham’s Law of the 14 th Century , www.statemaster.com/en... , which you should argue with economic gurus that , without a counter balancing measure to deal with different valued currencies like how tariff law revalues a product par to the post of calls currency value , so the currency is not undermined of its value , and defeats its support of its working peoples ability to be competitive , ” When 2 different valued currencies trade in the same markets , the Lower valued currency will drive the higher down and out of circulation ” , so by what is said in that valuing currencies in terms of Commodity values , the currencies of China and the USA should be way closer in value than they have been over the past 15 years of WTO trade , because Commodities are traded in par valued international markets .
So to consider that before we had the WTO trade agreement of 1994-5 , we had Balanced Trade deficits and a sound dollar , and a healthy Manufacturing base in the USA , the very support structure for wealth creation , that then feeds the secondary markets and infrastructures , a debate on how we can use a Bid Concept for all forms of Imported goods , like if we take the effective cost of what it would cost to manufacture a product in a given nation , and the price of raw materials is based off the international Commodities price indexes , so that the value to produce in one country is equal to or is reflective in what kinds of trade agreements can be made to keep all trade nations currencies sound should be the way in which a price for a product should be arrived at , as well as our domestic needs should be the new economy fundamental we seek in our Country , to go with this health care renovation .
Maybe the re-establishment of the old Bretton Woods would be a direction all International trade partners could debate as a direction of Re structure , www.statemaster.com/en... .
The Current Trade agreement is lacking sound currency terms so our living wages can maintain cost of living increases to keep up with the inflation , which is just the way its been since the beginning of economic societies so this needs to be debated .
I constantly read about the demise of the dollar through foolish monetary policy but aren't all the foreign governs guilty of purposely keeping their own currency low to target exports here to the biggest market in the world. It is this paradox that keeps it a relative stalemate. This will continue UNTIL the intern countries start to develop more independance - is this occurring? Possibly with commodity boom- but it is best to see this exhibited in diversions in equity valuations between the countries.
However, nations are leaving the dollar. Brazil and Argentina have agreed to stop using the dollar in trade between them and four other S.A. nations have said they will join that. China has made deals with about six nations where the dollar will no longer be used. The G-20 are pushing for a new global currency. The government keeps weakening the dollar.
Do we believe the FED is going to try and raise interest rates to help the dollar and make the economy worse? Also, if interest rates go up, our interest on debt would quickly double since so many nations moved out of long term bonds to short term notes and bills.
You have nations calling for their gold stored here to be delivered back to them. Why? Have they lost faith in our government? If so, that also means they have lost faith in the dollar.
Now, if the global recovery is an illusion then yes, the dollar could rally big when that illusion is exposed. In order for the dollar to really rally, people would need a reason to leave global equities and the international stock in our DOW, S&P and NAZ. A global recovery means rising sales and revenues. A falling dollar also means even higher numbers when converted into devalued dollars.
Regarding inflation. It will be the 2 billion middle class consumers, not the U.S. consumer that determines our prices. Because raw materials are determined by global demand, our demand is not going to drive the price of goods made from those raw materials. That takes us back to, "is the global recovery real or is it Memorex?"
We could easily see asset prices continue down while food, fuel and imported goods go up 10's of percent in price if the global recovery is real as that could make the dollar continue to fall.
The more the emerging markets trade with each other and grow their internal consumption, the less they need the dollar and the less they will use it.
At the same time, we are getting deeper and deeper into a debt hole and interest on debt hole. We have had a break as the nations leaving longer term, higher interest debt, have actually lent us money at a lower rate. But, when that trend reverses with any interest rate increase, then we won't be able to pay the bills to even the degree we now do (or rather can't).
The CBO projects a quadrupling to $820 billion which is more than we took in from Corporate and individual tax receipts combined in the last year. Where do you borrow money from to pay interest on borrowed money? Who lends to a nation that can't fund virtually anything it does?
Yes, we certainly could have a rally in the dollar but, not for long. We have not changed one thing that got us in this mess. Congress has been warned we can't grow or tax out of this so, where do we go even if we delay this awhile?
On Sep 08 03:56 PM twitee wrote:
> If USD goes down, S&P 500 and DOW will go up. Gold prices are
> telling us that the FED would like to create an inflationary scenario
> making the recent rise in Equities valid.
>
> What we need is inflation not a deflation.
>
"When (if ever) is the USD going to disjoint itself from a risk trade inter-connected with equities?"
Some currency pairs are independent and are influenced by fundamentals in the country. Look at EURGBP where Mervyn King sent the GBP into a tail spin after increasing QE. When can we start to see this with the USD. I feel a bit fed up with everything moving in tandem with each other! I am perhaps one of very few who would like to see equities move higher on positive corporate earnings prospects and the USD move higher against currencies such as JPY due to yield differentials influencing institutions and central banks. It could be a while before this happens though....
Maybe the author could let us know,what secret Uncle sAm has up his sleeve to strengthen the dollar. Very soon, Americans have to work harder to make a living and pay the taxman.
Did you know that Israel receives billion$ of USA tax dollars and has the world's best free medical care for it's chosen ones and one of top booming economey? We americans pride ourselves of our American money.Visit Cuba--and lately the greenback-hardly no-one ants it .Game is over for the american buck -don't get suckered in :^/
"are you long the dollar?"
(great 'gotcha'! question)
If Soros knows what is going to happen to the dollar, and china, japan.. russia.. etc. etc. are calling for a new world currency - I recommend everyone convert dollars to assets asap.
As for myself with some assets in Euro, I can't complain. I get more and more dollars for the Euro's and with falling real estate prices I can buy homes in the US for less than half than a few years ago and with a little luck the prices will go up again and the $ becomes stronger again.
On Sep 09 10:06 AM jaume ribe, spain wrote:
> Make it easier, fundamentals in the Eurozone are far worst than in
> the US. How and how long the € can keep on its currently extravagant
> value ?
Oh, and Kirk -- The USA is still the largest economy by a good margin. China just passed Japan, but they have a decade or two to pass us.
On Sep 09 09:21 AM americanincanada wrote:
> The common wisdom is that all the printing of money will result in
> strong inflation. So the contra position is the opposite: it is hard
> to imagine inflation coupled with a high unemployment rate. You need
> demand to drive prices up. Where is it going to come from?
Back to the original article, most of the dollars are bought by central banks. They dont have to short it to make it weak. There is so much dollar supply out there, people simply moving out from USD and into Euro or Yen will make it weak.
Phase I: USD weakens versus other so called "less flawed currencies".
Phase II: other "less flawed currecnies" also diminish in value versus commodities because the less flawed currenices themselves are also flawed fundamentally.
Definition of flawed currencies:
1. are papers issued by debtor nations
2. these papers themselves are either the USD or are backed by USD foreign reserves.
By definition of less flawed currencies:
1. papers issued by creditor heavy nations
2. these papers themselves are backed by USD foreign reserves.
How good can less flawed currecnies be when they are backed by flawed currencies. Basically, the collateral are flawed currencies.
People think the Yen or RMB is good? They are only relatively less bad(not as worse).
On Sep 09 03:18 PM Boxcar Willie wrote:
> It doesn't take excessive demand to create inflation. A weak currency
> will result in "imported" inflation as foreign goods become more
> expensive. It will, however, help to wean us of our appetite for
> foreign stuff.
>
> Oh, and Kirk -- The USA is still the largest economy by a good margin.
> China just passed Japan, but they have a decade or two to pass us.
>
>
> On Sep 09 09:21 AM americanincanada wrote:
While I generally agree with the gist of your post, a substantial number are arguing that the "new normal" will look a lot like the "old normal." A number substantial enough to create a lot of downward pressure on USDX, and fast. To them I suppose it looks like we are back in 2005. I beg to differ with this thesis, but it could take a little while for this to sink in. If you're in the FX market, going long USD (versus just about anything) right this minute could prove suicidal. There is definitely an end to this cycle, but I don't have any idea where it is - yet.
Thanks for the post, I'm looking at this too, just not quite ready to pull the trigger.
"...there will be more money printing which will be good for stocks...Right now people are just focused on the dollar weakness but not the equity strength."
And when this vast "more money printing" causes a debilitating inflation that devalues the U.S. dollar worldwide, how strong will the equity be?
China and Japan (remember that country?) do own much US debt. While the current US regime might want to continue expanding government to control ever more of its people's lives (and those who depend on it to stay alive are very loyal voters), at some point its drive to suicide begins to undermine shaky foundations in Japan (massive debt, horrid demographics, and an 0bamesque regime rolled into power on the Change™ mantra already promising industry-suffocating CO2 mandates), China (dubious figures, bad demographics), South Korea (demographics, potential DPRK collapse), and the EU (debt and demographics).
The dollar might become the new yen, but I don't see a credible replacement among developed countries with too few children to sustain Ponzi social systems, massive debts, and (I'm guessing) little personal savings (Why bother? The government will take care of me!).
time now that Gold will top even if it goes over $1,000.00 and
the Dollar will experience a significant rally, problem is timing.
When will they top and bottom? That is the question.
E. Tippett
Chicago, Illinois
On Sep 09 01:50 PM Chris - Long Beach, CA wrote:
> I just watched a youtube video, the guy interviewing George Soros
> asked
> "are you long the dollar?"
> (great 'gotcha'! question)
> If Soros knows what is going to happen to the dollar, and china,
> japan.. russia.. etc. etc. are calling for a new world currency -
> I recommend everyone convert dollars to assets asap.
Recessional bust are here and how your survive or die. It depend upon you. Henry Ford in making his car more affordable for ever man with a decent job would not made his cars less than 100% more reliable than that of the horses. He assembled his cars one after another and all of his engines ran and ran and kept on running.
The customers buying into their money worth is to sell the very best that their money can buy or telling when what to buy is to sell nothing but your problem.
On Sep 08 09:22 PM Canuck Economist wrote:
> The US dollar like most currencies fluctuates on technical issues
> driven by ST demand and supply; I think the article is correct from
> that perspective.
>
> The dollar will also move based on fundamentals. I believe the US
> dollar is fundamentally wounded because the US economy is fundamentally
> wounded. Things will not improve until the govt deficit, and the
> current acct and balance of payment deficits are tackled. There is
> a need to resolve the fundamental issues of an economy out of whack,
> with too much consumption, not enough investment or saving - the
> wrong signals are being given now in terms of the price of forward
> money because the printing press has created such high supply of
> currency. The article would be wrong on that acct. But we are also
> well aware of all these issues and the market reflects this.
>
> The third reason why the dollar moves is to do with expectations.
> If the current issues are all factored in; then we should look at
> what to expect next. The American economy is the most powerful economy
> in the world (in spite of the stupidity of its bankers, financial
> industry and Bush's government) and will rev up again in spite of
> all the negativity currently being experienced. The question is when.
> If one believes that we have just gone past the bottom (look at production
> not employment numbers) and that governments will slowly start sopping
> up the excess currency, then the US dollar should start to recover.
>
>
> I believe it is perfectly consistent to have higher growth relative
> to trading partners and a observing a strengthening of the currency
> (actually that is what the theory predicts). Overall, I think the
> article is right.
On Sep 09 02:44 AM herd mentality wrote:
> umm... i think we also need people working :) U6 + self employed
> people like realtors (who are not selling much) + college kids looking
> for that first real job = close to 20% ACTUAL unemployment. I don't
> care what U3 is... thats a shoddy indicator for unemployment. If
> we keep shedding jobs and those with jobs are taking pay cuts and
> being squeezed to work more... coupled with a new "frugality" mindset.
> How is our economy going to expand? Even if they print 10 trillion
> dollars. Who is borrowing it? Who is lending it. The money supply
> is expanding behind closed doors and filling up bank reserves. Banks
> are using it to get to proper ratios since they were all slicing
> and lending on so little actual reserves. Then factor in all the
> toxic assets being mopped up. Taxes have to keep inching up to pay
> for all this crazy deficit spending, bailouts, and neo socialist
> extravagance. So that puts more pressure on those with a job.
>
> So where is all this inflation going to come from in the near term?
> People need jobs, optimism and expendable income or at least a willingness
> to borrow. People just aren't buying those McMansions and boats and
> trophy crap like 3 years ago... And its not coming back any time
> soon.
>
> Really, they will have to just cut checks for a few grand to every
> adult in US right before christmas if they want some real nice inflation
> to happen. Deflation is here. If china and other buyer's of US security
> instruments don't freak out... this recovery and all the happy inflation
> talk is a bunch of hoopla in my opinion. Maybe I just read too much
> Mish Shedlock.
This is nothing more or less than a contrived economy to support the staus quo governments. To call any of what is going on a free market in any sense of the word is absolutely insane.
As we speak I'm sure billion of your tax $$$ are being spent to shill or beat down markets from the Dow to gold.
It is anyones' guess how long they can continue with their farce, but so far, it continues.