BEING STREET SMART
by Sy Harding
Note: This is a look back at a Being Street Smart column from last September.
The U.S. Dollar! (September 18, 2009)
The U.S. dollar fell to a 12-month low against most major currencies on
Thursday, with by far the majority of currency traders believing it will
continue its freefall. And on the fundamentals, the dollar doesn’t seem to have
much going for it to reverse the trend.
Global interest rates are at historic lows, but few as low as the record low Fed
Funds rate of 0 to 0.25% in the U.S. The European Central Bank’s key interest
rate is also at a record low, but at 1%. That creates lucrative opportunities
for speculators to borrow dollars at low cost, and invest the proceeds in
higher-yielding assets elsewhere.
Further pressure on the dollar is coming from major trading partners of the U.S.
They receive inflow from their exports in dollars, and if those dollars are
declining in value, it tempts them to sell dollars and buy other currencies.
Meanwhile, with global commodities priced in U.S. dollars, still other
countries, particularly oil-producing countries, are unhappy with the dollar
being the world’s primary currency, as they are also being paid with a currency
that is declining in value.
So pressure that began from China, Russia and Venezuela to have the dollar
replaced as the global currency by a balanced ‘basket’ of various currencies, is
spreading. A few weeks ago even the United Nations Conference on Trade and
Development called for replacing the dollar with a ‘global’ currency.
There is also little incentive for the U.S. to intervene in currency markets to
support the dollar (as global central banks often do to support their currencies
when necessary). The U.S. is struggling to come out of a severe recession, and
anything that makes foreign imports more expensive for U.S. consumers, and U.S.
exports less expensive for consumers in foreign countries, is a boost for the
U.S. economic recovery.
So the U.S., as it has done for the last ten years, talks a good talk about how
it supports a strong dollar, but does nothing about the situation.
Fed chairman Bernanke, perhaps inadvertently, prompted last week’s further
plunge in the dollar when he stated that the U.S. recession has probably ended
technically, but that the recovery will be slow with potential pitfalls along
the way. That was taken by currency traders as an indication that the record low
interest rates in the U.S. will probably be in place for quite some time yet,
encouraging currency traders to increase their short-sales of the dollar.
But be careful about jumping in against the dollar at this point.
As with all market moves, after its
big decline the easy money to be made by betting against the dollar has become
the talk of the financial media, with “Sell the dollar, buy the Euro,” the most
popular advice from analysts.
But with big profits having already been made by the smart money that entered
near the top in July, and the trade being belatedly popularized in the media,
it’s more likely time to be watching for an upside reversal.
Here are two reasons why I think an upside reversal may be near for the dollar.
Investor sentiment against the dollar has become extremely one-sided, which must
have professional currency traders on the edge of their seats ready to take
profits. The Bloomberg Dollar Bullish Sentiment Index has fallen to 30.8, from a
high of 68.86 a year ago, its lowest level since it fell to 30.3 in March, 2008.
It’s of interest to note that March, 2008 marked the bottom of the dollar’s
multi-year plunge from its high in 2004. From that low in March, 2008 the dollar
rallied 25% to its peak in March of this year. And here is sentiment against the
dollar back to that extreme of bearishness.
My second reason to think an upside reversal in the dollar may be near is that
in its decline the dollar has now become very oversold beneath its
30-week moving average.
The long-term history is that its 30-week m.a. acts as a powerful magnet on the
dollar. Any time in the past that the dollar was in a bull market and became
overbought (over-extended) above the m.a., it soon pulled back at least to
retest the support at the m.a., even if it was then to resume its bull market.
More important to the current situation is that any time in the past that the dollar was in a serious decline and became oversold beneath its 30-week m.a., it soon began to rally back up at least to the m.a., even if it was destined to then resume its decline.
Given the current high level of short-selling of the dollar, any upside reversal
that begins would likely result in short-sellers being forced to the buy side to
close out positions to an unusual degree, creating a fast spike-up move.
So those are my reasons for believing
this is not a good time to take new positions in the so-called “easy money” trade
against the dollar.
Sy Harding publishes the financial website Street
Smart Report Online, and a free
morning blog at www.SyHardingblog.com.
In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear
Market. His latest book is Beat
the Market the Easy Way - Surprising Seasonal Strategies that
Double the Market's Performance.
FOR MORE STREET SMART commentaries, charts, etc. click below on Home and then the Library link.
These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance.
Back to the Top Home Forward to a Friend >>>
Copyright
© 2009 Asset Management Research Corp. -- ALL RIGHTS RESERVED.