Time To Go Long The Dollar?

As we warned yesterday, dollar weakness is not over. However that statement is only true for the US dollar against the Japanese Yen, Swiss Franc and the Euro. This is because the US dollar actually strengthened against the commodity currencies and the British pound as risk aversion triggers dominate the currency market.

Even though I have been calling for the US dollar to continue to weaken against the Euro, Japanese Yen and Swiss Franc, there could be a further recovery against the high yielders. Being long dollars may not be the wrong trade if it is against the right currencies. Triple digit swings in the US stock market and 300 pip swings in currencies will make it very difficult for carry trades to recover.

In fact, I am more bearish on carry trades than the US dollar. Since the AUD/USD and NZD/USD are also carry trades, they are vulnerable to further weakness. It is important for traders not to forget that the US dollar is now a funding currency for carry trades.

Thankfully the Federal Reserve is not alone.

According to Barney Frank, the Chair of the Financial Services Committee, the Treasury department is finally willing to discuss ways to help the hundreds of thousands of Americans facing foreclosure. Proposals by Frank include forgiving a portion of some of the remaining principal and insuring up to $300 billion in refinanced, affordable-cost mortgages. Capital requirements have also been cut for Fannie Mae and Freddie Mac, which will allow them to use some of their excess funds to buy mortgages. This would add up to $200 billion of immediate liquidity into the mortgage backed securities market and hopefully the combination of efforts from the US government and the Federal Reserve will put an end to the market’s misery. Realistically, it will be some time before these plans are passed and any stimulus will also need time to filter into the markets.

In the meantime, the Philadelphia Fed manufacturing survey and leading indicators are due for release tomorrow. The drop in the Empire State manufacturing survey to a record low suggests that we could see a similar move in the Philly Fed index. Leading indicators should also be dollar negative given the sharp deterioration in the US economy and in the stock market.

Comments

[Lisa]

Is there any way to go long the dollar against these individual currencies using ETFs? Most of the ETFs listed below the article headlines seem to be the other way, eg. FXE is long the Euro.

[AndrewHorowitz]

Good idea. We have been adding to UUP for the last 4 weeks a it seems to be well positioned.

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[Mike Stathis]

That's a credible take on alternative currency positions. However, in my opinion, it is better to stick with strength against the dollar rather than currencies that might show weakness. It's a numbers game. There are many more currencies that will continue to outperform the dollar rather than underperform it. I think your strategy might be more suitable for experienced currency traders.

To forgive any remaining principal for those facing the potential threat of foreclosure would be an assualt on our free market system; a system that is already broken for many industries (eg. oil and healthcare). Such a move would cause further damage. How can one justify bailing out those who can't make payments on homes while neglecting others who have borrowed funds from relatives, savings, and made other concessions?

It makes no sense to reward the most financially irresponsible while punishing those who tightened up their belts. Certainly, the mortgage industry along with Wall Street is to blame for this mess. But everyone must be treated fairly. Otherwise, homeowners might stop making payments on their mortgage in order to get a writedown on principal, causing even more problems.

As far as the Fed loosening the capitalization requirements of Freddie and Fannie, that is simply irresponsible. Already they have been undercapitalized and this will serve to increase the risk of further devastation. The Fed will keep printing money causing even more devaluation of the dollar. Either way you slice it, there is no way out of this mess. Trying to avoid the pain will only make the devastation worse, maybe not now but most certainly down the road.

Greenspan tried to mitigate the effects of the Internet bubble by collapsing rates, and that led to the current real estate and banking crisis. What crisis will Bernanke create? I do not know what it will be but if he keeps acting in this irresponsible manner, we could be looking at a problem even worse than we face now in a few years.

[Mr. G]

As the knives keep dropping and the FED tries to prevent freefall, the dollar will correct in response, but the visibility of risk and failure of similiar institutions like BEAR STEARNS is not clear, and this places a jaundiced light on futher dollar strength. Buyer beware. Why did Bear Stearns and J. p. Morgan rise after buying a bundle of worthless debt? Is there more bad debt to surface. I dont hear any fat ladies singing yet and the markets are fickle depending in their focus.

[AmesTiedeman]

If you want to be long the U.S. Dollar then you had better be ready to sell fast. The U.S. dollar is not going to rise for any period of time. This is not a tradable move for most people.