Where is the U.S. Dollar Headed?
Good morning everyone. The U.S. dollar has certainly taken it on the chin this week. I would have expected nothing less, given its powerful run and the Federal Reserve's recent action. The day that it announced it was going to buy treasuries, the dollar experienced its third largest percentage drop in its history (at least since daily pricing of it started in 1970). Moreover, it is headed for a record weekly decline, sliding 5.6% versus the Euro and 3.7% versus the Yen thus far. I'm sure that the move versus the Yen made the huge number of people who own the FXY happy.
Bespoke published a chart which shows that despite its weakness this week, the U.S. dollar is still at a fairly high level. Heck it's only sitting where it was back in January and it had made a huge move to the upside to get there.
It will be interesting to see if this knee-jerk reaction continues or if the dollar stabilizes at a level near this. Contrary to popular thinking some dollar weakness could actually be a positive. A return of the dollar to a slightly lower level would make U.S. exports more competitive and further improve our country's balance of trade. Of course, it goes without saying that you can have too much of a good thing and the implosion of the dollar would be a hyperinflation creating disaster.
I was in the dollar bear camp for a long time, but I believe that my views were too ethnocentric. I never realized how much rubbish the decoupling theory is and how much weakness in the U.S. would crush other countries' economies. Similarly, I never realized how leveraged European banks are and how overvalued its home prices were or how little domestic demand China has actually been able to stimulate. Or the lengths to which so many countries would go to devalue their currencies.
No one knows for certain how far the dollar will fall, but for now I am in the camp that believes the fears of its eminent demise are overblown. Time will tell. I certainly understand why one would think that the dollar is doomed, but...
- Other countries' economies are just as messed up as the U.S. economy is, or worse.
- Other countries are taking steps to devalue their currency, just like ours is.
- For whatever reason, the U.S. dollar is still the world's reserve currency and people still see it as being "safe" or at least safer than other currencies.
- Massive global recessions are deflationary in nature. They decrease the demand for and in turn the prices of goods.
It is a big step for me to admit these things. I was a dollar bear for a long time. I'm certainly not a raging dollar bull. I can easily see it slowly dropping in value over the next several years. As is usually the case, I just believe that the truth about the dollar is somewhere in the middle.
It should have never soared to its recent highs and it probably will not completely fall off of a cliff. I just don't see the Fed's decision to buy Treasuries as the dollar's death sentence. I'm sure that the dollar is headed lower in the near term, but I think that it will eventually stabilize and that its fall will be somewhat orderly. I've put a lot of thought and research into that statement and believe me I could be wrong, heck a lot of people certainly disagree with me, but that's my opinion on the subject right now. I'm sure that manyof my fellow CAPS players have some strong opinions on where the dollar is headed and why. I'd love to hear your thoughts on the subject.