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D Fry Market Outlook 11 04 2007

Among the handful of concepts we've been posting as important to watch, the fate of the dollar has been consistently one. We've noted it being on a cliff for many months, and perhaps Tuesday the fall begins. I hope Bucky has a chute.

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A falling dollar is generally inflationary. Given the trade deficit with China that reportedly doubled Tuesday, trade tensions have mounted. The U.S. has filed a complaint with the WTO and China doesn't like it. A falling dollar doesn't ease the trade deficit much with China since their currency is managed.

Plus a falling dollar will cause gold to rise as investors understand the dollar/inflation relationship. Further gold price increases are also, beyond global geopolitical tensions, a vote of no confidence in monetary policy within the U.S.

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As we just mentioned yesterday, overseas markets have produced the best returns over the past four years. One aspect of this is currency. U.S. dollar-based investors profit more in overseas funds when the overseas index and currency are strong. But be warned, if trade disputes erupt, everything can change.

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I was going to outline some U.S. markets, but then that's not the main theme today is it? It may be tomorrow.

The week is still young and you can bet officialdom is keeping close tabs on both currency and gold markets. A smackdown could occur at any moment.

A further warning is that trade wars and tariffs are market negative eventually, but only temporarily politically satisfying to some. The Chinese are playing from a rigged deck while the U.S. sometimes appears to be just gluttonous consumers and naïve politically. One day we'll wake up and the Chinese will present us the bill.

Have a pleasant evening.

Disclaimer: Among other issues, the ETF Digest maintains long or short positions in: PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN), Euro Currency Trust ETF (NYSEARCA:FXE), CurrencyShares Australian Dollar ETF (NYSEARCA:FXA), CurrencyShares Canadian Dollar (NYSEARCA:FXC), PowerShares DB G10 Currency Harvest Fund (NYSEARCA:DBV), streetTRACKS Gold Trust ETF (NYSEARCA:GLD), PowerShares DB Precious Metals Fund (NYSEARCA:DBP), PowerShares DB Base Metals Fund (NYSEARCA:DBB), Market Vectors Gold Miners ETF (NYSEARCA:GDX), PowerShares DB Energy Fund (NYSEARCA:DBE), PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC), iShares MSCI EAFE Index Fund ETF (NYSEARCA:EFA), iShares S&P Europe 350 (NYSEARCA:IEV), iShares S&P Latin America 40 Index Fund (NYSEARCA:ILF), iShares MSCI Australia Index Fund (NYSEARCA:EWA), iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), iShares MSCI South Korea Index Fund ETF (NYSEARCA:EWY) and iShares MSCI Austria Index Fund (NYSEARCA:EWO).