So Many Dollar Questions, So Few Crystal Balls...

Joined : 23 Dec 2007 Posts : 241 Location : Nigeria

Good Day Currency Traders! Very Happy

It was a tough job but somebody had to do it.

I had an interesting conversation with a fine gentleman. He said to me, "You seemed a little unsure of the case for the dollar rally." My short answer was, "That's because I am unsure."

But I can say that about any position I take. If staying in the game is part of your plan, you should always be somewhat unsure or uncomfortable with your position.

I proceeded to explain that no matter how I feel about a particular currency, I am ALWAYS unsure. No doubt you need to be able rank one of your investment views above the rest, so you have the confidence to make investment decisions and pull the trigger on specific trades.

Question Everything! Especially Yourself...

But by the same token, about one-nanosecond after you pull the trigger on a trade/speculation/investment, it's critically important to ask yourself: Could I possibly be wrong?

And when it comes to the dollar rebound story in 2008, there are a multitude of reasons why I could be wrong; here is a list of a few:

There are just too many dollars being created and nobody wants them. This falls into the "keep it simple" category. And for the most part, it makes sense.

We haven't yet reached a big enough sentiment extreme. In fact, we are seeing bank analyst types warm to the idea the dollar will bounce.
If gold and the dollar are a mirror image, as gold represents purchasing power in a real world of "stuff," then the dollar is due of a beeline to new low territory.

Inflation in the Gulf States is exacerbated for those states with a dollar-pegged currency regime. Maybe they pull the trigger soon.

Instead of the Taylor Rule (monetary policy rule supposedly followed by Mr. Bernanke) pointing to 2% Fed Funds rate, perhaps it could fall to 1%.

Decoupling (global growth without U.S. participation) is real and stronger than we expected.

Russian leader Putin calls for all Russian oil to be priced in euros instead of dollars as a way to punish the U.S. for what he sees as encroachment on his turf.

China realizes a stronger currency is in its best interest and allows for faster appreciation of its currency and targets its massive reserve base toward its domestic consumer. Thus, reducing the need to hold so much U.S. paper.
There are eight reasons. Some of course are a lot more plausible than others, but overall probably not a bad list for this early in the morning

Could Gold Be the Master Pulling at the
Dollar's Strings?

Of late the U.S. dollar has looked weak. Any, or all, of the above list of rationales may be on traders' minds if you're seeking to apply some cause and effect. But I'm still clinging to one piece of evidence that could suggest there may be more going on underneath the surface that will support the dollar than most believe.

And that piece of evidence is gold. cheers

Granted, the recent gold-dollar relationship is a thin reed of evidence, but the charts below are definitely interesting.

Gold vs. US$ Index Daily: The point of this chart is to show that until January 30th 2008, intermediate-term new highs in gold were quickly met by a corresponding new low in the U.S. dollar index

Till Recently, When Gold Went Up,
the Dollar Came Down

Gold divided by a currency basket (monthly series) that includes (euro, Swiss, pound, Aussie $, Canadian $, and yen): Gold has gone parabolic against these currencies beginning around July 2007. That happens to coincide with the first major bout of global credit crunch. You could really draw many conclusions from this chart. But a couple of things pop into my head:

Gold is finally playing its role as a safe haven against ALL fiat currencies

If gold is playing a safe haven role, AND money flows back to the U.S. from institutional fund managers spooked out of overseas markets, is it possible we see a gold-dollar decoupling? In other words, could both gold and the dollar appreciate against the currency pack at the same time?

Does this parabolic-looking move suggest we are nearing a top in the yellow metal?

Is Gold Getting Set for a Correction Soon or
Will it Continue to Rise WITH the Buck?

Hmmm...So many questions and so few crystal balls!

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Making 'Cents' of the Headlines
The Dollar's Latest Blow Came from the Philly Area...

From Currency Director: Sean Hyman

What Happened:

Last Thursday the buck really took a short-term blow when the Philadelphia Fed Manufacturing Index numbers came out. The number was -24 vs. the -10 that analysts expected. Ouch! This shows that manufacturing is still contracting - at least in that area of the country.

Unfortunately, the trend just continued from the previous week when the Empire State Business Conditions Index came out. That showed that manufacturing in the New York region is still contracting.

What I Say:

So when you put this together with the previous ISM manufacturing numbers (which cover the entire nation), it showed a contraction as well. This does not bode well for the U.S. economy and in the near term all of it weighed down the buck.

The bright spot for the buck? All of it (so far) still can't take the dollar below its "30-year lows" that it hit recently.

However, there are still some real problems in the U.S. economy that have to be fixed or the dollar's "doomed" to be knocked off its perch. If policymakers don't address these problems (and I have my doubts as to whether they will be), then the dollar will lose its title as the world's reserve currency.

So with the unemployment rate still going up (at 5% now) and job losses of 17,000 in the latest Non Farm Payroll report, its not looking pretty.

On top of this, a greater long-term problem persists. We're not bringing in enough money into America consistently to cover our debts. Here's a good recent example.

Earlier this month, the Trade Balance numbers came out. We're at -US$58.8 billion on our "deficit" to the world. Yet, as the foreign money flows into the U.S. show (which is the TICS data), there's only US$56.5 billion coming in. So that means we brought in US$2.3 billion less than what we needed to cover our "bills."

Trends like that can't continue or we'll eventually slip down the ranks and become only the 3rd or 4th most powerful economy rather than the top country in the world (economically).

In the long run, unfortunately, I see America traveling down the same road as the U.K. did. They were once the world's biggest superpower. They were also the world's reserve currency. Since World War II, the U.S. has held both of these titles.

Now Britain has slipped down the ranks several spots. I also think you'll see the same thing happen to the U.S. probably sometime in our lifetime.