U.S. Dollar Bears Will Remain On The Run In 2012

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Includes: EUO, FXY, UDN, UDNT, UUP, UUPT
by: The PolyCapitalist

Since its March 2008 low the U.S. Dollar is up 13% against a basket of the world's most widely held currencies, including the yen, sterling, franc, loonie, krona, and of course the beleaguered euro.

How is this a problem for portfolio manager Axel Merk, the self described "Authority on Currencies"? After all, according to Merk's written after-the-fact letters he claims to have traded out of and back into the euro just in time to surf its wild gyrations.

Merk moved his fund management business to California a number of years ago, where he has been beating a steady 'demise of the U.S. dollar' drumbeat ever since. This past year Merk Funds even took to deploying amusing anti-Dollar cartoon propaganda while routinely touting the superiority of the euro over the U.S. dollar.

Scaring American investors about the future value of their currency may be a helpful short-term tactic for drumming up mutual fund business (and electoral votes). However, diversifying away from the U.S. dollar hasn't proven to be the slam dunk which Merk led people to believe. This is particularly true when the global financial system hits a speed bump or, as is the case with the current European sovereign debt crisis, something larger.

Just how much trouble can the U.S. dollar be in when the world has consistently fled to its safety during stormy times these past four years? The short answer is not much.

It's not entirely fair to pick on Merk here. Other currencies have outperformed the U.S. dollar since the crisis (e.g., Swiss franc). And perhaps Axel Merk will be proven right about the fate of the dollar one day. But for now the only truly global currency which can be held safely in large quantities is the U.S. dollar. The Eurozone debacle has clearly demonstrated the lack of substitutes during times of crisis.

And yet Eurogeddon is just one of several tailwinds that will be lifting the U.S. dollar's sails in 2012. Ben Bernanke would prefer to stay apolitical and keep QE3 muzzled until after the U.S. presidential election. And as Krugman, et. al rail on-and-on about it does appear that the anti-stimulus, deflationista retiers (read: strong dollar crowd) currently have the upper political hand.

But wait, there's more! Investors should not be surprised to see China, whose property market just imploded, devalue the renminbi this year. A China slowdown spells trouble for commodity currencies around the world. And will 2012 be the year in which Japan finally tips over? Predicting exactly when the Land of the Rising Sun's finances implode has sent many a speculator into earlier-than-hoped retirement, and for me the signals aren't yet clear enough to make a precise timing call. But suffice it to say that as the global debt crisis rolls its way through the Eurozone and beyond it probably has a few more stops to make before arriving on the shores of the heavily, but still manageably, indebted United States.

Sorry Axel, the death knell you've been sounding for the almighty U.S. dollar will have to be put on hold for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.