| Being Street Smart | | | | point. |
| Sy Harding | | | | As with all market moves, after its big decline the easy |
| THE U.S. DOLLAR! September 18, 2009. | | | | money to be made by betting against the dollar has |
| The U.S. dollar fell to a 12-month low against most | | | | become the talk of the financial media, with “Sell |
| major currencies on Thursday, with by far the majority | | | | the dollar, buy the Euro,” the most popular advice |
| of currency traders believing it will continue its freefall. | | | | from analysts. |
| And on the fundamentals, the dollar doesn’t seem | | | | But with big profits having already been made by the |
| to have much going for it to reverse the trend. | | | | smart money that entered near the top in July, and the |
| Global interest rates are at historic lows, but few as | | | | trade being belatedly popularized in the media, it’s |
| low as the record low Fed Funds rate of 0 to 0.25% in | | | | more likely time to be watching for an upside reversal. |
| the U.S. The European Central Bank’s key interest | | | | Here are two reasons why I think an upside reversal |
| rate is also at a record low, but at 1%. That creates | | | | may be near for the dollar. |
| lucrative opportunities for speculators to borrow dollars | | | | Investor sentiment against the dollar has become |
| at low cost, and invest the proceeds in higher-yielding | | | | extremely one-sided, which must have professional |
| assets elsewhere. | | | | currency traders on the edge of their seats ready to |
| Further pressure on the dollar is coming from major | | | | take profits. The Bloomberg Dollar Bullish Sentiment |
| trading partners of the U.S. They receive inflow from | | | | Index has fallen to 30.8, from a high of 68.86 a year |
| their exports in dollars, and if those dollars are declining | | | | ago, its lowest level since it fell to 30.3 in March, 2008. |
| in value, it tempts them to sell dollars and buy other | | | | It’s of interest to note that March, 2008 marked the |
| currencies. | | | | bottom of the dollar’s multi-year plunge from its high |
| Meanwhile, with global commodities priced in U.S. | | | | in 2004. From that low in March, 2008 the dollar rallied |
| dollars, still other countries, particularly oil-producing | | | | 25% to its peak in March of this year. And here is |
| countries, are unhappy with the dollar being the | | | | sentiment against the dollar back to that extreme of |
| world’s primary currency, as they are also being | | | | bearishness. |
| paid with a currency that is declining in value. | | | | My second reason to think an upside reversal in the |
| So pressure that began from China, Russia and | | | | dollar may be near is that in its decline, as I show in a |
| Venezuela to have the dollar replaced as the global | | | | chart on my daily markets blog, the dollar has now |
| currency by a balanced ‘basket’ of various | | | | become very oversold beneath its 30-week moving |
| currencies, is spreading. A few weeks ago even the | | | | average. |
| United Nations Conference on Trade and | | | | The long-term history is that its 30-week m.a. acts as |
| Development called for replacing the dollar with a | | | | a powerful magnet on the dollar. Any time in the past |
| ‘global’ currency. | | | | that the dollar was in a bull market and became |
| There is also little incentive for the U.S. to intervene in | | | | overbought (over-extended) above the m.a., it soon |
| currency markets to support the dollar (as global | | | | pulled back at least to retest the support at the m.a., |
| central banks often do to support their currencies | | | | even if it was then to resume its bull market. |
| when necessary). The U.S. is struggling to come out of | | | | More important to the current situation is that any time |
| a severe recession, and anything that makes foreign | | | | in the past that the dollar was in a serious decline and |
| imports more expensive for U.S. consumers, and U.S. | | | | became oversold beneath its 30-week m.a., it soon |
| exports less expensive for consumers in foreign | | | | began to rally back up at least to the m.a., even if it |
| countries, is a boost for the U.S. economic recovery. | | | | was destined to then resume its decline. |
| So the U.S., as it has done for the last ten years, talks | | | | Given the current high level of short-selling of the dollar, |
| a good talk about how it supports a strong dollar, but | | | | any upside reversal that begins would likely result in |
| does nothing about the situation. | | | | short-sellers being forced to the buy side to close out |
| Fed chairman Bernanke, perhaps inadvertently, | | | | positions to an unusual degree, creating a fast spike-up |
| prompted last week’s further plunge in the dollar | | | | move. |
| when he stated that the U.S. recession has probably | | | | So those are my reasons for believing this is not a |
| ended technically, but that the recovery will be slow | | | | good time to take new positions in this so-called |
| with potential pitfalls along the way. That was taken by | | | | “easy money” trade. |
| currency traders as an indication that the record low | | | | Additionally, with other markets, including gold and the |
| interest rates in the U.S. will probably be in place for | | | | stock market, so closely linked to the direction of the |
| quite some time yet, encouraging currency traders to | | | | dollar, keeping a close watch on the dollar for a |
| increase their short-sales of the dollar. | | | | possible reversal may well be more important than |
| But be careful about jumping in against the dollar at this | | | | watching those other markets themselves. |