Reports Of The Dollar's Death Are Greatly
Exaggerated
The Dynamic Wealth Report
October 29, 2009
by Robert Morris, Editor
For months now, the mainstream media, Wall Street pundits, and various
foreign leaders have been saying the U.S. Dollar is critically ill. They
claim the once mighty dollar is severely weakened and heading for a big
fall.
And, there are sound reasons behind these concerns.
The Federal Reserve has held interest rates at near-zero levels since
December 2008. And, they’ve flooded the financial system with trillions
of newly printed dollars.
The government claims these extreme measures were necessary to save the
financial system and stimulate the economy. But, investors are concerned
these policies could lead to runaway inflation. If that happens, the
dollar will lose value very rapidly.
Thus, a self fulfilling prophecy has unfolded to push the dollar lower.
Fearing out of control inflation, investors are moving money out of
dollars into riskier assets offering higher potential returns. In other
words, they’re dumping dollars to buy stocks, commodities, and foreign
currencies.
Ironically, the mass exodus out of the dollar is causing the exact
consequence investors feared… a plunging dollar.
After hitting a high of $89.49 on March 5th, the dollar has moved
steadily lower and lower. Last week, it set a new 52-week low of $74.94. That’s more than 16% off the March high.
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But, this week the dollar’s been rising on heavy buying.
And, a world renowned currency and commodity trader says the dollar
rally may “last for a while”.
Jim Rogers is the chairman of Singapore-based Rogers Holdings and the
author of several excellent books on global investing. He also
co-founded the Quantum Fund with George Soros in the 1970s.
Rogers thinks the dollar is poised to rally. A die-hard contrarian
investor, Rogers sees the dollar rising as global stock and commodities
markets experience a long overdue correction.
In an interview with Bloomberg Television, Rogers had this to say:
Everybody is pessimistic on the dollar. Whenever you have everybody on
the same side of the boat, you know what you have to do. We may have a
rally in the dollar, a decline in commodity prices or stock prices for a
while.
I couldn’t agree more. You see, the dollar has an inverse relationship
with stocks and commodities. As those markets rise, the dollar usually
falls and vice versa.
This relationship makes sense.
When investors become fearful for any reason, they tend to sell out of
riskier assets and buy safer investments like dollars or Treasuries. This causes stock and commodity prices to fall and the dollar to rise.
The opposite is also true.
When investors are no longer fearful, they tend to sell out of low risk
assets like the dollar and Treasuries to buy riskier assets like stocks
and commodities. This causes the dollar to fall and stock and commodity
prices to rise.
We just saw this happen from March through October.
With the huge run up in the stock market, investors are now seeing an
opportunity to take profits.
Many are thinking the Fed will have to raise interest rates sooner
rather than later. They’re afraid the economy will overheat more quickly
than usual as it recovers. To get out in front of inflation, the Fed may
have to raise interest rates before any obvious signs of inflation
appear.
Today’s better than expected GDP report is further evidence the economy
is recovering rapidly.
Remember, as soon as the Fed hints about raising interest rates, the
dollar will begin strengthening. And as we’ve seen, a rising dollar
means stock and commodity prices will likely fall.
Now, Rogers doesn’t think were at the beginning of a bull market in the
dollar, and neither do I.
The Fed’s not likely to raise interest rates until there are clear signs
of inflation. If they raise rates too early, the recovery might stall
and the economy could fall into a “double dip” recession.
What does this mean for us?
Instead of a bull market in the dollar, we have a short-term trading
opportunity. The dollar is oversold and the stock market is overbought. A correction in both markets is long overdue.
The easiest way to take advantage of a short-term pop in the dollar is
with an exchange traded fund (ETF).
The PowerShares DB US Dollar Index Bullish (UUP) ETF tracks the price
and yield of the Deutsche Bank Long US Dollar futures index. This index
is composed of long futures contracts designed to mirror the performance
of the dollar against the Euro, Japanese Yen, British Pound, Canadian
Dollar, Swedish Krona, and Swiss Franc.
We’re not looking at potentially huge gains here unless the Fed signals
it’s going to raise rates very soon. But, when stock and commodities
markets do correct, you could make good money in UUP.
With markets declining across the board, several triple-leveraged short
ETFs are starting to move up from major 52-week lows. Here’s a few of
the top performers over the past week. Direxion Daily Small Cap Bear
(TZA), a triple short on the Russell 2000 index, is up 12.5%. Direxion
Daily Mid Cap Bear (MWN), a triple short on the Russell MidCap Index, is
up 11.3%. And, Direxion Daily Emerging Markets Bear (EDZ), a triple
short on the MSCI Emerging Markets Index, is up 10.5%.
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