Reports Of The Dollar’s Death Are Greatly Exaggerated

| October 29, 2009 | 0 Comments

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.

   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.

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Category: Currency Trading

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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