A US Dollar Rally Against All Odds…

| September 28, 2011 | 0 Comments

It’s no secret the USD is screaming higher.  In just over three weeks, we’ve seen the US Dollar Index climb from just around 74.00, to 78.50. And that’s after it has spent most of the year trading between 73.00 and 76.00.

But you’ve got to be wondering… is this rally for real?

I’m going to tell you why the rally defies economic common sense, how it’s all happened, and more importantly, where the US Dollar is headed next.

First off, the current Dollar rally isn’t based in reality.

You see, the US debt ceiling has been raised to $15.1 trillion.  With all of that debt on the books, the value of the greenback should move lower.  But there’s more to the story…

If you recall, S&P downgraded the US debt rating.  Their primary concern is the US political system’s inability to compromise and govern effectively.  Sadly, they’re completely on point.  No matter which side of the aisle you’re on, you can’t be proud of either party’s leaders.

But even after allowing a credit downgrade on their watch, Congress is back at it again…

After weeks of infighting, the US lawmakers finally passed a simple stopgap bill.  We’re talking about a bill designed to keep the country running for just another seven weeks!

It really doesn’t bode well for the larger 2012 budget negotiations.  Can anyone say super-committee?

While these issues alone present major hurdles to the US economy, we’re also seeing the Fed flood the market with cheap Dollars and lock down rates for another three years!  And this is where a US Dollar seems out of touch with reality.


Simply put, for any investor to run jumping into the US Dollar is crazy.  Rates are locked in near zero… It’s not a good return on your investment!  And with all the money printing, the value of the Dollar should head lower too.

You’d think any sane investor wouldn’t touch the US Dollar with a ten-foot pole.

But there are a couple of reasons why investors are buying right now…

First, every other traditional “safe haven” has run out of, well… safety.  Remember, the US Dollar was once the king of “safe haven” currencies.  As the world’s reserve currency, there’s been no better place to park your money during financial turmoil.

But as US debt mounted and economic growth slowed… the US Dollar was abandoned.  Basically left for dead.  No one wanted to park money in a “bloated fiat currency” (or so the media has told us).

It’s pretty clear investors were looking for better options.  And they certainly found it.

As a result, the Swiss Franc, Japanese Yen, and even precious metals like gold are being used as “safe havens”.

But here’s how the currency markets became skewed…

In previous rough economic times, there’s no doubt the Swiss Franc and the Yen were used as “safe havens”… but usually along with the US Dollar.  This time, the greenback was left out of the mix.

So all of the “safe haven” demand is being pushed into the two currencies, as well as into gold.  Now pay attention, here’s where this gets tricky…

The Swiss watched as their currency appreciated to record levels.  The Japanese had the same problem.  And both fought back with interventions.  But the world wouldn’t have it… The demand for these two currencies reached historic levels.

And investors continued piling into the currencies!

As a result, the Swiss were forced to take extreme action.  To lock down the currency, the Swiss central bank pegged the Euro and the Swiss exchange rate.  They put a floor of 1.200 on the currency…

And that sent investors running for the exits.  Now that the currency is controlled to limit appreciation… no one wants to be caught dead holding the Swissie.  It has nowhere to go but down!

Further east, the Yen is still riding high at record levels.  As a result, the Japanese finance minister has threatened to take “bold action” to protect their currency.  This means the BoJ could intervene on the Yen in a major way.

Interestingly, the mere mention of a currency intervention is keeping potential buyers of the Yen at bay… They want no part of potentially huge losses an intervention can dish out!

To wrap up, I mentioned gold was being used as a safe haven play. Historically, the yellow metal is used primarily as an inflation hedge.  But recently buyers of the metal have somehow equated “inflation hedge” to “safe haven”.

But gold has its own risks.  After failing to reach a new high, the precious metal simply dropped off a cliff.  The precious metal fell over $250 in just a few days.  And it may have taken gold off the “safe haven” menu for now…

So where’s an investor to run and hide?

Nowhere but back into the welcome arms of the mighty US Dollar! Unfortunately for the US Dollar, it’s only the safe haven of last resort.  And it’s only temporary.

Remember, with unwieldy debt, an impotent government, and a central bank locking down interest rates and running the currency printing presses… there’s no long-term reason to be a US Dollar bull. None.

So where does this leave the US Dollar?

It’s my opinion we’ll see a short term rally for a while, but then it will fizzle out.

Once global fear subsides and investors come to their senses… you can bet the US Dollar freefalls to new lows.

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Category: Currency Trading

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