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Where is the U.S. Dollar Headed?

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March 20, 2009 – Comments (8) | RELATED TICKERS: USD , UDN

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.

Deej

8 Comments – Post Your Own

#1) On March 20, 2009 at 10:02 AM, EHoyle80 (< 20) wrote:

“Hang on to your hats” is the Stock Research Portal’s response to the Fed’s $1 trillion injection into the U.S. economy.

“Where does the Fed get the money to buy long-term Treasury Bills? It prints it. Why does the Fed need to buy these Treasury Bills in the first place? Presumably because the foreign investors who previously bought them have lost their appetite (or at least some of it) for U.S. paper.”

Via Stock Research Portal 

With the new license to print money, here comes inflation.

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#2) On March 20, 2009 at 10:40 AM, mustbepatient (29.52) wrote:

Deej,

I share your views on the dollar.  Yes, our government is actively devaluing it, but every other country is devaluing their currency just as much.  Even the Swiss are doing "quantitative easing".  Thus, anyone blindly shorting the dollar vs. other currencies will probably be surprised.

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#3) On March 20, 2009 at 12:59 PM, jesusfreakinco (28.93) wrote:

Others may be printing, but at what rate and from what baseline? We were already running deficits at a 6% of GDP rate and now... up over 10% perhaps even higher.

The primary printing to solve these issues will have to come in the US because we have a lot more large messy banks to clean up.  Plus, we are being held hostage by the Chinese.

I agree the road down may be slower than us gold bugs may like to admit.  China is likely to be quiet about their disposition of the USD rather than causing panic.  Time is now to be in commodities and producers of such.  The bull market for commodities is back and back with a vengeance.

JFC

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#4) On March 20, 2009 at 2:03 PM, walt373 (99.83) wrote:

"With the new license to print money, here comes inflation." 

This is not necessarily true. Yes, the US govt is printing money, but it's to offset the huge amount of deleveraging going on in the economy. As companies and households deleverage, the money supply contracts. The question of inflation vs. deflation depends on who wins this battle. If the government can get it "just right", catastrophe might be averted.

I'm sure this has been said, but the one argument I like for inflation is that the government has a vested interest in avoiding deflation: debt. Deflation hurts those with debt because they will owe more money in real terms. But inflation helps those with debt. The government's enormous amount of debt puts them in inflation's corner. With much more control over the money supply than during the last time we encountered serious deflation - in the 30s - I agree with you that we are much more likely to see inflation.

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#5) On March 20, 2009 at 2:23 PM, TMFDeej (99.27) wrote:

Hi JFC.  Thanks for reading.  Sure China and Japan built up huge surpluses, but many other countries are running much larger deficits than many Americans realize.  We just know more about ours because we live here and it's in the press all the time.

Many European banks were actually much more leveraged heading into this whole mess than U.S. banks were.  Similarly, the boom in real estate in many places in the Middle East, Western Europe, the U.K, etc... was even larger than the one that we experienced here.  Again, we just hear more about the problems that are going on in the United States because that's the media that most of us are exposed to.

The rest of the world is getting hammered pretty darn hard, much harder than I personally had expected by the slowing U.S. economy.  Japanese and Chinese exports have fallen off of a cliff.

The velocity of money is dropping more rapidly than the U.S. can print it.  Some day when the economy stabilizes again the velocity may return and we will experience inflationary pressure, but I still believe that unless the ROW tells Uncle Sam to go jump in a lake and begins to sell dollars (which hasn't even come close to happening yet) that we are likely to see flat prices to deflation in the short run. 

I think that the U.S. dollar may indeed eventually slowly begin to lose value, but some sort of eminent collapse is much less likely than many alarmists believe.  Who knows though, this is just one man's opinion albeit a well-read man's for whatever that's worth.

Deej

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#6) On March 20, 2009 at 4:25 PM, awallejr (81.03) wrote:

If you gave anybody on the street in most countries a choice to have either $100 US dollars or $100 in their country's currency equivalent, I'm willing to wager most would grab the US cash.  Yeah expanding the Fed Balance sheet is potentially inflationary down the road, it may not necessarily be so.  It really depends on the Fed's ultimate exit strategy and how careful they implement it.

While I still like commodities long term, that is more a supply/demand reason than a currency one, since most commodities are finite in the end (unless we start mining on Mars).

My biggest problem with all this "hyperinflation" talk is that I just don't see the corresponding wage growth, which is what you really need.

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#7) On March 20, 2009 at 4:47 PM, outoffocus (23.12) wrote:

My biggest problem with all this "hyperinflation" talk is that I just don't see the corresponding wage growth, which is what you really need.

That is not true.  If the US Dollar were to collapse vs. other currencies we would see massive inflation simply because all the goods we import would go up in price.  We saw a prime example of that when oil went up last summer.  The price of food and everything that depended on oil skyrocketed.  Because the US imports so much of its products (especially oil), we would see that kind of price inflation again if the dollar collapsed.

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#8) On March 20, 2009 at 10:12 PM, awallejr (81.03) wrote:

Yeah but it wasn't sustainable as we eventually saw.  What we saw was speculative influences, not true supply/demand play.  And if anything diminished demand, due to inability to pay collapsed the price of oil in spectatular fashion.

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