The Substantial Perils of a Falling U.S. Dollar

Includes: UDN, UUP
by: Ted Kavadas

I remain very concerned that the U.S. dollar is vulnerable to a substantial decline. I have written extensively on the subject, as I believe it to be among our greatest economic threats.

I have heard the widespread arguments that conclude a lower dollar as positive and beneficial to the U.S. economy. However, I think these arguments are largely based on the assumption that such a dollar decline would be “reasonable” (i.e. not a sudden decline of unexpected magnitude). However, in my (admittedly very unique) opinion, various technical and fundamental analyses support a substantial dollar decline. My analysis indicates that once the U.S. dollar (currently at 77.07) falls below the 70-area it would likely usher in a new trading environment that would not be supportive.

Further supporting the idea that the U.S. dollar is vulnerable is the very strong price action of gold, other commodities, other currencies, and the stock market. While it may be easy to believe gold and other commodities are in a bubble, such strong price action (which has far outpaced the U.S. dollar’s decline to date) may well be indicating a large impending dollar decline.

Should a substantial U.S. dollar decline occur, as my analysis indicates, I think it will prove very detrimental to the U.S. economy and financial markets. Furthermore, it will prove very difficult to reverse.

The U.S. has never had to deal with a currency crisis and its concomitant adversity. This quote from John Maynard Keynes, from his book Economic Consequences of the Peace, highlights the perils of currency debasement:

Lenin was right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

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