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The US Dollar: A Marathon, Not A Sprint

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May 08, 2008 – Comments (4)

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.

Deej 

4 Comments – Post Your Own

#1) On May 08, 2008 at 8:37 AM, abitare (71.93) wrote:

yepper: UDN

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#2) On May 08, 2008 at 10:00 AM, TMFHelical (98.81) wrote:

Deej,

Nice commentary.  I don't know that the fed really can drop rates much more.  Inflation adjusted they are lower now than under Greenspan.  But I'm with you in not expecting them to move up anytime soon (6 months or so).

Zz

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#3) On May 08, 2008 at 11:29 AM, AnomaLee (28.56) wrote:

As far as forex trading... I really don't know how much farther the dollar is going to go from here. There has been some large state institutional on the Forex Street over the past few weeks. Even Brazil Finance Minister has been selling the real and buying U.S. dollars over that time... 

Maybe these people had too much lead in their toys, but somebody big has made attempts to support the dollar. As far as the dollar being devalued vs other currency in the U.S. Dollar Index... I think we're closer to the bottom mid-term, but that doesn't mean that currencies across the globe aren't inflating ---> thus inflation is bound to continue,

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#4) On May 08, 2008 at 12:23 PM, binv271828 (< 20) wrote:

Hey Deej,

You and Sinchiruna are definitely thinking along the same lines.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=50618&t=01006124249416869148 

And, I agree. UDN is a good bet. 

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