CurveTrader

Changing My Stance on the Dollar

Good Points. I absolutely agree with you on Treasuries, although timing is critial, as bubbles can continue longer than you can stay solvent. Regarding the dollar, there are several points that make me think that this is simply a correction in the uptrend- and a bear market rally for the Euro. Firstly, rate differentials will fade next year as more and more central banks are forced to cut their rates to zero. In Europe, Germany will not be able to hold up the region and the currency, as countries such as Spain, Italy and Greece are already in big trouble. Secondly, this is a global recession and the wolrd's major export countries, Japan and Germany, will not come out of it if their currencies go through the roof. At some point central banks will intervene. Thirdly, commodity prices have not risen along with the declining dollar and gold has not broken major trendlines, weakening the argument of a trend change for the dollar. I simply cannot see inflation on the rise any time soon. The Fed might try to reflate the economy, but in a country that is deleveraging and is already loaded with debt, that will take a long time. Furthermore, the deleveraging of hedge funds may be over for now but probably will come back in Q1 as new redemptions set in. From an intermarket perspective, a trend change in the dollar would imply a trend change in commodities and equities which I can't see. Commodity, equity and real estate prices will probably continue to fall next year, causing deflation. Finally, major trend changes are normally not signaled by spikes (see Euro chart) on low volume, which are more the result of short covering rallies. So, you are correct on the trendline breaks, but I think one has to be cautious and move to the sidelines first and watch how the dollar moves at the beginning of the next year when volume comes back. I absolutely agree with you not to go long any of these currencies against the dollar now, but rather watch the bubble in Treasuries to burst in the next three months and open short positions.