Seeking Alpha
Profile| Send Message|
( followers)  

Will the dollar ever rebound against the euro and other major currencies? The euro had a tough time for a while when the Greek debt crisis exposed cracks in the multi-nation currency alliance. Since then, it has rebounded considerably while the dollar has plumbed the depths. What’s ahead for the dollar?

wikipedia-commons-euro-banknoten.jpg

Source: Wikipedia Commons

To start, it should be no surprise that the dollar is weak. Diluting, demeaning and depressing the dollar has been semi-official policy for years, dating back to 2001-2002. If our leaders in Washington DC wanted to stop the decline of the dollar, they could. Easily. Therefore, if the dollar is falling — and it is — they want it to fall.

This chart shows the dollar against the euro. Click to enlarge:

Source: St. Louis Federal Reserve

We have a weak dollar policy

To nail down the point, this decline has been the policy of the Federal Reserve under both Greenspan and Bernanke. This is not the fault of China or Europe or anyone else. It is not the fault of American consumers or manufacturers. The fault lies in the policies of the Fed and the U.S. Treasury.

Is the dollar doomed?

Given how far the dollar has declined, many observers are assuming the decline will continue unabated. So, is the dollar doomed? Answer: No.

However, as long as the Fed keeps short-term interest rates near zero, the dollar is likely to be weak. If things get really scary as they did in 2008, investors may again flee to the dollar, but that would be an interruption of the trend, which should remain intact as long as U.S. interest rates are very low.

This chart shows the dollar versus major currencies. Click to enlarge:

Source: St. Louis Federal Reserve

As you can see, the dollar has fallen against other major currencies in addition to the euro. Again, this process is entirely reversible if the Fed wanted to reverse this trend. All they have to do is raise the Fed Funds rate and the dollar would stabilize.

Assuming that does not happen, is there any chance the dollar will rebound? The answer is yes. I believe we will see a rebound because the dollar outlook is so universally gloomy and so one-sided. It may seem counter-intuitive that sentiment could change on the dollar, but just think back to what happened during the financial panic of 2008. Stocks, commodities and precious metals tanked, but the dollar soared.

If you don’t think sentiment can turn quickly, consider silver. The sentiment for silver was so positive and one-sided that it went up in a near-parabolic arc — that is, until it suffered a steep sell-off.

Until our feckless leaders in Washington and New York change their mind, the dollar is likely to remain weak, but that does not mean it will be on a straight line down. I feel a rebound coming and, if the dollar rebounds, it is also very likely that stocks, commodities and precious metals may be weak for a bit.

Source: Will the Dollar Ever Rebound?