As stocks continue to rally the dollar has been taking a beating. Yesterday, the buck hit a seven-month low against the British pound and an eight-month low against the Aussie dollar. And traders are predicting that the euro will rise to $1.45 in the near term.
Yesterday, we laid out the bearish case for the dollar. We warned that one of three things would happen as a result of Washington’s spending spree: sovereign insolvency, inflation or serious fiscal pain.
This point hasn’t been lost on forex traders. Positioning data from the Chicago Mercantile Exchange, a proxy for hedge fund activity, reveals that in the week ending May 19 short positions against the dollar versus the euro exceeded bets on dollar strength by 12,250 contracts. This was the highest net short position against the dollar since the week of July 15, when the dollar hit a record low of $1.6038 versus the euro.
The dollar is difficult to like. Its fundamentals are awful. But so are the fundamentals of the euro and the British pound. This is the point made by former emerging markets banking analyst James Kostohryz and picked up by contrarian blogger Mish Shedlock.
Kostohryz points out that although the economic fundamentals in the US are weak, they are stronger than the fundamentals of the vast majority of other major industrialized countries. He also rightly argues that bond yields are rising in other countries as well as in the US and that central banks in other major economies are also furiously printing money.
The fact is that economic fundamentals in the US, and the fundamentals of the US financial system in particular, are much better on average than in the vast majority of other industrialized countries. Inexplicably, although the value of the dollar is measured against other currencies, the bears never even seem to fathom this.
Next time you run across one of these Dollar Cassandras, please ask them to tell you the names of the currencies that the Dollar going to decline against, and to please speak to you in detail about the relative fundamentals of these nations. Ask them about sovereign debt ratios. Ask them about external debt ratios. Ask them about bank capitalization ratios. My experience has been that when you pose this question to the perma-bears, it usually elicits a long pause and empty stare.
Kostohryz’s point is a good one. But as Mish says, “fiat currencies do not really float anyway. They simply sink at varying rates, slowly going worthless over time.”
This is why we don’t recommend speculating against the dollar in the forex markets. Buy gold instead. All fiat currencies eventually end up at zero. Gold does not.