Below is a monthly chart of the USD index (DXY) since 2000. In that period of time it has died a slow death down 37%. A currency is like a stock in a company and this is one company shareholders continue to sell. Whether it be the shrinking manufacturing base, millions in lost jobs, rising debt, weak leadership, lack of new products in the pipeline to fuel growth, this company (excuse me country) is in trouble right now.

Honestly though, the above analogy is exactly how one should think in buying the US dollar right now. Are there other countries whose fundamentals are stronger and thus a more compelling reason to buy their currency? Continuing on with the analogy imagine the US has become Dell and China is Apple right now. Which employees of the company or citizens of the country can expect an increase in wealth in the future? Will Apple employees be paid more? Will they be paid higher bonuses since there is more profit to share? Certainly they will. They will be in a better position to buy more discretionary items or save more. Their quality of life will improve as wealth is transferred.

What is happening in the US is no different than what has happened to Dell or any other company that has fallen from prominence. Rising inflation for example means a lower quality diet. As meat and chicken prices rise, those on a fixed income will be forced to eat lower priced alternatives to stay within their budget. Discretionary purchases will be scrutinized further. Savings will be used to subsidize lower income and higher expenses. As the US dollar falls further the problem will only grow.

Eventually the US dollar will be forced to share the reserve currency status. This means even higher prices. Less access to capital for US debt which also means higher cost of credit for all Americans. I certainly would not count out the US in the long run. We have a lot of "goodwill" and other "intangibles" that China and other countries do not have. Is Dell going to be stuck in the basement forever? Probably, but that doesn't mean the US will.

Still we face some very serious times ahead of us. We only respond to structural problems when forced to. Right now the world is selling the US dollar. They are buying other currencies or precious metals. Even within the US there are over ten states passing legislation to allow gold to be used alongside the USD for everyday commerce.

The chart below is a scary one. Anyone who has traded long enough knows catching a falling knife is dangerous. Until the US can fix its structural problems, few if any investors will be interested in buying their stock.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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