Think Twice Before Shorting the U.S. Dollar

Lets face it…everyone seems to hate the US Dollar. Seems every Forex trader wants to be short the US dollar. So many think the US dollar will crash (maybe it will, who knows), but what I do know as a commodity trader is that when too many traders are on the other side of the boat something happens. My short on the US dollar was recently taken out.

What is interesting is that Nouriel Roubini is starting to speak about the US dollar carry trade. A carry trade is when traders/speculators borrow in one currency and buy assets in more risky currencies. I remember the blood bath for the Japanese Yen in 1998 when the Yen carry trade blew up. Julian Robertson took a major hit as well as countless commodity and forex traders. The US dollar has replaced the Yen and is the now choice of potential danger.

Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals. Traders who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets (Aussie…New Zealand… Brazil’s Real) and other global assets are not just borrowing at zero interest rates in dollar terms, they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions. Trades like this do not last forever.

Is the mother of all carry trades and mother of all highly leveraged global asset bubbles fermenting?

No one knows the catalyst why/if this can end, but the US dollar will not fall to zero and at some point it will stabilize. When that happens, the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800 billion purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

How many forex traders, commodity traders or simply speculators will be caught on the wrong side of this trade? Probably countless.

What is the point? Trade with a plan; do not trade the news. Realize anything can happen, because it will happen.

Comments

[Jeff Nielson:]

The fact that the author simply assumes that the "U.S. dollar will not go to zero" is proof he has no understanding of either the PRESENT condition of the U.S. economy NOR the track-record of the Federal Reserve.

With total public/private debt of roughly $60 trillion, and another $70-$100 trillion of "unfunded liabilities" there is absolutely no way of the U.S. managing these debts/liabilities - no matter how low the dollar is devalued. What this means is that there are NO ASSETS OF ANY KIND backing each new dollar printed. Obviously the value of these incremental dollars is ZERO.

Secondly, in less than a century, the Federal Reserve has already destroyed 98% of the purchasing power of the U.S. dollar. If not heading to "zero", exactly WHERE would this author have us believe this trend is going?

Nov 03 07:29 PM

[Albertarocks:]

I have to agree with the author 100%. The table is set for a surge that the majority probably thinks doesn't make sense. It appears there are a lot of folks who doubt that a surge in the dollar is possible when there have been so many dollars printed. That does indeed make sense, over the long term. But a squeeze like the author describes is very possible, dare I day darned near guaranteed. With sentiment at 97% bearish, the slightest thing could (will) set it off. Even the mention of credit contraction alone could do it.

Nov 03 07:49 PM

[Albertarocks:]

I should have mentioned that any surge would have to be short lived, but probably longer than most will expect. There's every chance that it could pop to somewhere in the range of 80-82 before resuming its ultimate journey.

Nov 03 07:51 PM

[Zell:]

Quote from article:
"So many think the US dollar will crash (maybe it will, who knows), but what I do know as a commodity trader is that when too many traders are on the other side of the boat something happens".

I agree with your assessment that something will happen, how about the possibility of burning all the FRN's and replacing them with something backed by TANGIBLE ASSETS instead of debt. Paying off debt with more debt is like borrowing from a loan shark to pay off another loan shark. Debt does not create wealth period.

Nov 03 07:52 PM

[Swashbuckler:]

My .02 worth.---- I concur with Albertarocks. Everything I read and hear trashes the USD. Nothing is that easy. My guess is the USD shows strength for a while.

Nov 03 07:58 PM

[The Geoffster:]

"No one knows the catalyst why/if this can end, but the US dollar will not fall to zero..." Sure it will. Every fist currency in the history of the world has fallen to zero. But you are right about one thing, no one knows when. In the meantime, get gold.

Nov 03 07:59 PM

[Donald Ingram:]

Andy - Excellent take on some likely outcomes for the dollar. Less than 3% of traders are long on the USD. Personally I like Mish's take on the dollar rebounding when the next "event" occurs with capital seeking safety. Even though the USD has suffered a loss of confidence - where else to go for safe haven? As the old saying goes "any port in a storm"! The USD rally will be short and high - just long enough to shake out the massive shorts and provide some profit for the nimble longs. Now, as to the global financial system riding out this coming storm is another matter! Interesting times!

Nov 03 08:00 PM

[Mayascribe:]

Funny that the author states, "Trade with a plan; do not trade the news."

Guess what? Until this market gets a general sense of direction, my plan is to trade with the news, or rather, trade before the news happens, as well as trade the direction of the dollar.

How can one trade before the news happens, one might ask?

If you are pretty sure company X is going to reveal good quarterly earnings, then get in ahead of the quarterly earnings call.

If you know company Y is going to be giving a lecture during an investor's event, and you know what they will be touting is viable, then get in before the investor's event.

Nothing's fool proof, but it sure has been working for me lately.

Today the CEO of BioSante (BPAX) gave a lecture; up over 12%.

Tommorrow will be interCLICK (INRK). Likely a terrific earnings report coming.

Thursday will be Jaguar Mining (JAG). Same as above.

Nov 03 08:20 PM

[Mayascribe:]

I'd like to add a caveat about Jaguar Mining. With today's news about India buying from the IMF 200 tonnes of gold, the Jaguar trade may not be as good as I had once thought it would be.

But if any trader wasn't trading that news today...

Nov 03 08:28 PM

[Albertarocks:]

This dink has no followers, is following nobody and has posted this piece of garbage 118 times. I let them know that I personally don't appreciate it. In my view there are proper places for free advertising, but SA isn't one of them. [e-mail]

Nov 03 09:40 PM

[jeremiah74:]

there are indeed many arguments agains the dollar. but the same arguments are true also for the euro, the yen. these two other large economic blocs are also 'printing' money. other currencies like the yuan are not freely convertible, and then others like the pound not only have their own does of printing but the fundamentals behind the UK economy may be even worse than the US's

so the arguments against the dollar completely ignore the fact that the currencies agasint which the dollar is supposed to weaken are not in a better position to strengthen

thats why many people are buying gold.

i suppose you dont include interest earned on the dollar, which may or may not have outpaced the rise in prices. but in any case with interest earned, the 98% destruction claim doesnt hold

"Secondly, in less than a century, the Federal Reserve has already destroyed 98% of the purchasing power of the U.S. dollar. If not heading to "zero", exactly WHERE would this author have us believe this trend is going?"

Nov 04 03:49 AM

[Dave Wrixon:]

What is darned well guaranteed is that interest rates in other economies which are low due to conditions in the US will rise faster than those in US where there will be enormous political pressure to keep them down to prevent the US Government becoming insolvent. A significant dollar surge based on market fundamentals rather than ephemeral sentiment is just about impossible. Sure you will have days when things go up instead of down but a sustained rally is out of the question. Even GS could not engineer that.


On Nov 03 07:49 PM Albertarocks wrote:

> I have to agree with the author 100%. The table is set for a surge
> that the majority probably thinks doesn't make sense. It appears
> there are a lot of folks who doubt that a surge in the dollar is
> possible when there have been so many dollars printed. That does
> indeed make sense, over the long term. But a squeeze like the author
> describes is very possible, dare I day darned near guaranteed. With
> sentiment at 97% bearish, the slightest thing could (will) set it
> off. Even the mention of credit contraction alone could do it.

Nov 04 04:57 AM

[Dave Wrixon:]

Sounds more like "Frying Pan into the Fire!"


On Nov 03 08:00 PM Donald Ingram wrote:

> Andy - Excellent take on some likely outcomes for the dollar. Less
> than 3% of traders are long on the USD. Personally I like Mish's
> take on the dollar rebounding when the next "event" occurs with capital
> seeking safety. Even though the USD has suffered a loss of confidence
> - where else to go for safe haven? As the old saying goes "any port
> in a storm"! The USD rally will be short and high - just long enough
> to shake out the massive shorts and provide some profit for the nimble
> longs. Now, as to the global financial system riding out this coming
> storm is another matter! Interesting times!

Nov 04 05:00 AM

[DONE_SONZ:]

Tighten rates?How?The whole world is in the toilet.Dollar strength?Magic?

Nov 04 06:59 AM

[jeremiah74:]

its likely that the market will push up interest rates in the US before the dollar falls further, if the economy recovers. and this will likely reverse the dollar's decline. political pressure to keep rates low is much stronger in other countries..

if there is no recovery than there will be another round of deleveraging, and the dollar being the funding currency it will rally.

in the short run, however anything is possible. the dollar can fall another 5% easily and gold go up 5% for example. but long term i dont think the dollar will collapse as many people seem to believe.

the yen and the euro will collapse before that

Nov 04 09:56 AM

[Tony Daltorio:]

The dollar will probably have a short-term bounce soon, when the stock market heads south.

But it will be a temporary blip. It's value, like all fiat currencies, is zero. And the US is pushing the dollar toward zero a lot faster than other countries around the world are pushing their currencies toward zero.

Nov 04 02:02 PM

[jeremiah74:]

"But it will be a temporary blip. It's value, like all fiat currencies, is zero. And the US is pushing the dollar toward zero a lot faster than other countries around the world are pushing their currencies toward zero"

if all fiat currencies are worth zero .. can you send me some ? ;)
i'll pay you the cost of transferring it, and i'll send you something in barter.. :)

far too many people take a black/white view on this whole fiat money versus gold and Fed printing money - inflation story

fiat currencies are not worth zero. im sure you drove to work today and bought the fuel for money, and paid for your lunch with fiat money too. it is true that the piece of paper that you use to pay for lunch is not worth much, its only backed by faith. but this system is still better than bartering tomatoes for a laptop computer. right ?

now gold or silver when you used as a currency, as it was in the past , was also based on faith. you can make nice jewellery out of it, but apart from that its not worth much in itself.. only if you know that people will be willing to exchange it with you for something else.
whats worth more, a glass of water or an ounce of gold ? how about this question after you were lost for 2 days in the Sahara.. every concept of value is very much based on faith, perception.. not something written in stone

the reason why people nowadays have this obsession with gold , is that while paper money's supply can be manipulated by its issuer, gold is nobody's currency, its everybody's and supply can not be manipulated. nevertheless the fact that paper money has a flexible supply might have been useful at times to allow higher economic growth over the long run. where things went wrong is when the central bank is mandated to pursue goals that are contradictory to purely safeguarding the purchasing power of money. the Fed's mandate is for example slightly contradictory in this sense. as opposed to say the ECB, who has a mandate to maintain low inflation only. a single mandate like this is more credible, thats why the Euro has actually - despite many not believing in it - turned out to be a strong currency in its first 10 years

fiat money is here to stay. at least everyone better hope so, because if it doesnt than the world will look a lot like a Mad MAx movie

Nov 05 06:55 AM