The US Dollar: A Marathon, Not A Sprint
I have been saying for a while now that we are probably due for a short term bear market rally in the U.S. dollar, but that I personally have little doubt that in the long term it will continue to drop. The always insightful Bespoke Investment Group posted a chart on its site the other day that illustrates exactly what I have been saying (see article: The US Dollar: A Marathon, Not A Sprint)
People keep pointing to the fact that the Fed will eventually start to raise rates as a reason why the dollar will continue to strengthen. The dollar did eventually begin to strengthen when Greenspan's Fed pulled the rug out from under the housing bubble that it helped to create and went on a massive interest rate raising campaign from mid-2004 through mid-2006, but after rallying for about a year the dollar's slide continued.
I am not convinced that the Fed is going to begin raising interest rates any time soon anyhow. I expect the U.S. economy to continue to flounder for the next year or so as the inevitable consumer slowdown that high food and gas prices combined with tighter credit and a loss in home equity would have caused is postponed by the government stimulus checks. Once the checks are spent, I believe that the true weakness in the economy will become apparent.
I'm not one of those "The end of the world is near. We're all going to be living in caves, eating berries and twigs, and using bark for toilet paper. Invest in ammo and generators now!!!!" people who expect that we are headed for the next Great Depression. I just believe that the economy will be flat to slightly down for the next year or a little less and weaker after that. I don't see how the Fed will be able to raise interest rates in that sort of environment. I suspect that we will sit at a Fed Funds Rate around 2.0% for a while and that the next move in it is probably more likely to be a 25 basis point cut than a hike.
In the long run, it really doesn't matter what happens with interest rates anyhow. The U.S. government is wasting more money than ever and we still import a lot more stuff than we export. The long term trend for the dollar is down and investors can continue to take advantage of this by purchasing foreign companies in countries that have stronger economies and currencies, U.S. companies that export goods, and companies that are involved with commodities, particularly oil, natural gas, and ag plays.