Mounting Contrarian Evidence Suggests Dollar Nearing a Bottom

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I have been anticipating a reversal in the dollar which I now believe is imminent as more contrarian evidence continues to build in the dollar’s favor (see previous articles for more details). Most recently Bloomberg reported that several countries in Europe are trying to take advantage of the falling dollar,

Sept. 18 -- Germany and Austria led governments and companies in Europe selling $21.7 billion of bonds in the U.S. currency this week to take advantage of the reduced cost of exchanging the proceeds back into Euros.

Other countries including Belgium and Spain have also begun selling Dollar bonds. Dollar bears will see the headline and see confirming evidence, however timing is everything and to me the timing here is very interesting. Sentiment surveys show that nearly everyone is currently bearish on the dollar, in fact people are about as bearish today on the dollar, as people were on stocks in early March, and of course that proved to be one of the best buying opportunities in history.

Governments are typified by slow, lumbering, bureaucratic behavior and they act in a “horse has already left the barn” fashion. With that in mind, let us further reflect on these bearish headlines. These Governments are basically selling Dollars for Euros, in the belief that dollars will continue to decline, and the Euro will continue to go up. A brilliant move… had they done this several years ago, but no, they are doing this now that the US Dollar is hovering just above its all time lows. In essence these Governments are trying to pull off a 22 billion Dollar currency pair trade… the problem is Governments are not that smart. The fact that these Governments are trying to act like a hedge fund, guarantees that they will fail miserably, and will instead suffer a loss.

In GC Seldon’s classic book, “Psychology of the Stock Market” Seldon states that, “The greatest fault of ninety-nine out of one hundred active traders is being bullish at high prices and bearish at low prices.” In early March stocks became momentarily cheap as nearly everyone was bearish on stocks. Headlines reflected this by showing images of floor traders in shock, along with proclamations that the collapse of the world financial system was nigh. Again, that turned out to be one of the best buying opportunities of all time. Today, the actions being taken by these foreign governments and headlines such as this,

Sept. 19 (Bloomberg) -- The dollar dropped to the lowest level in a year versus the euro as Federal Reserve Chairman Ben S. Bernake's declaration that the recession is likely over led investors to sell the U.S. currency and buy riskier assets,

shows a similar mindset regarding the dollar. Now that no one wants to own dollars, it is probably a good time to own dollars.

Disclosure: Long SPY puts.