Is the U.S. Dollar About To Crush Stocks?
Currencies / US Dollar Nov 02, 2009 - 07:00 AM GMTBy: Graham_Summers
Long-time readers know that I’ve begun to develop a love/hate relationship with the US Dollar. On one hand I believe the US currency is horribly flawed given our unserviceable debt load and the Fed’s profligate spending.
However, on the other hand, to make money investing you have to be willing to go against the crowd. And with less than 3% of investors currently bullish on the US Dollar, the contrarian in me can’t help but wonder if we have the makings of a serious Dollar rally similar to the one that kicked off the 2008 Crash in stocks.
Thanks to Ben Bernanke and pals, the US Dollar has essentially become THE carry trade for the entire world. If you’re unfamiliar with “carry trades” these are investment strategies in which you borrow in one currency (usually one with very low interest rates like the Dollar today) and invest in another currency or investment class of higher returns. Provided the second investment returns substantially more than interest rate on the currency you’re borrowing in, this can be a highly profitable strategy.
With interest rates at 0.25% or so today, the US Dollar has become the carry trade of choice, with investors all over the world borrowing in Dollars and investing in stocks, gold, oil, virtually any investment class you can name. The end result is that the Dollar has begun to trade at a near perfect inverse relationship to pretty much everything out there:
Carry trades work fine until the currency you borrow in rallies (or suddenly interest rates go up). When this happens the profit margin disappears the trade often reverses as investors sell the second investment in order to pay back the money they borrowed.
Which may be happening for the US Dollar right now. Last week, the Dollar rallied strongly as stocks, commodities (everything but gold), collapsed. The question now is whether this was the start of a genuine Dollar rally or simply a brief head-fake before the US currency rolls over to test 72: its 30-year low.
From a technical standpoint, the Dollar failed to break its 50-ema. Until this happens, the US currency remains in a downtrend.
However, it’s worth noting that the Dollar held its ground at 76 and change. Previously, 76 was a point of downward resistance. The fact that the Dollar rallied ABOVE this level and held it IS a sign of increased strength. If the US Dollar HOLDS here we may in fact be seeing the first signs of a rally in the US Dollar. If this happens, expect to see stocks and commodities (with perhaps the exception of Gold) completely collapse in a repeat of the second half of 2008.
Long-term I believe the US Dollar is a horribly flawed currency. The US has absolutely no way of paying back the debts it owes. And we’ve now spent more money battling the Financial Crisis than we did in WWI, WWII, and the New Deal combined.
However, with so much of the investor world betting on a Dollar collapse, the stage is set for a MAJOR surprise here. Even a brief bounce in the Dollar could become a full-fledged rally as shorts and other investors who are borrowing in Dollars rush to cover their shorts (buy Dollars).
Keep your eyes on the most-hated currency in the world. It could be flashing a signal that stocks are due to collapse. I’m already preparing investors for what’s to come with a FREE Special Report detailing THREE investments that will explode when stocks start finally collapse. While most investors are complacently drifting towards the next Crisis lke lambs to the slaughter, my readers are already getting ready with my Financial Crisis “Round Two” Survival Kit.
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Good Investing!
Graham Summers
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
© 2009 Copyright Graham Summers - All Rights Reserved
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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