Dollar Lacks a Fundamental Catalyst for Strength

Barron's had an article calling a bottom in the dollar; the article focused mainly on the euro.

This is a potentially very complex issue. I've been on the weaker dollar bandwagon for several years now, but the magnitude has exceeded my expectations. Looking forward, I expect the dollar will generally not be strong but I would expect there to be years like 2005 where the dollar does go up.

The reason to phrase it as "the dollar won't be strong" is because it is down a lot, can only go so far and what I think is missing is any fundamental catalyst for a higher dollar. Of course, any tradeable thing can go up for no reason at all.

The Barron's piece tied in visibility for ECB rate cuts combined with a steady (after this week) Fed creating a closing of the interest rate differential. People have been talking about this for a while - it's either priced in or it's not.

If the dollar does go up against the euro because of central bank action, then it would probably make sense to diversify into currency products that do not have euro exposure. Besides the obvious ETFs and ETNs ,the PowerShares Dollar Down (UDN) would probably be a bad bet because it tracks the inverse of the dollar index which is 57% euro.

In a dollar up against the euro world, I think currency diversification could still be had in surplus countries, countries still raising rates and emerging market currencies that will have huge growth regardless of what happens in the US. (Egypt seems interesting, strong versus the dollar, one year t-bills in the sevens, GDP in the sixes, inflation is hot just above 10%, but no way to easily access the Egyptian pound that I am aware of).

Comments

[Donald E. L. Johnson]

On CNBC this morning, Warren Buffett said expects continued weakness in the dollar over the long term, which, I guess, for him, is the next five to ten years. He said he can't predict the near term for any markets.

[User 30121]

Ooooh, scurry, flee, beware! That Barrons would predict a dollar bottom is laughable, but typical! Why? Because Barrons is Barrons and they rarely get it right! Barrons is akin to the naysayers out there that GUARANTEE that the gold and silver bubble has burst! Well, then, if the dollar has bottomed, and the precious metal bubble has burst, fine! Now, just get the hell out of the way, because your impeading me from going out and making my precious metals PURCHASES!

[CLH]

A currency goes up when interest rates go up. US interest rates have bottomed and will go up now, thus the dollar will go up. Also the euro interest rates look like they are headed down, again making the dollar stronger. Commodities and gold will tank.