Is the Dollar's Next Leg Up at Hand?

By: Chris Temple | Tue, Feb 23, 2010
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Today's trading demonstrates anew the truth of the single most important investment consideration affecting the markets these days; one that I expect to continue for the foreseeable future. And that is, that the U.S. dollar and U.S. Treasury debt denominated in the world's reserve currency remain THE most desired "safe haven" assets in the marketplace.

I know that's a tough nut for a lot of you to handle; and it even makes a few of you out there blind with rage. Don't lose hope; one day, the markets WILL treat the U.S. currency with the same fear and/or derision now being enjoyed by the euro and sterling. That will be appropriately so. But the present reality is something different; and it's one investors need to factor into their behavior. Indeed (and I'll separately be discussing -- for subscribers -- more specific technicals on the dollar and other markets its behavior is affecting), we may be about to see another powerful move higher for the greenback.

Today, two primary factors are giving the dollar an added tailwind. First, it was reported overnight that Bank of England Governor Mervyn King was holding out the possibility that his bank may need to recommence its quantitative easing program. The purported reasoning is that the English economy is now weighed down not only by its own troubles, but by the newly-deteriorating pace of economic activity in Europe. This news served to take sterling to a new multi-month low versus the dollar and -- as I write these words -- has dragged the euro along to nearly a new cyclical low for it as well.

Secondly, markets were particularly surprised this morning by the unexpected horrendous latest reading of U.S. consumer confidence. The 10+ point plunge in the Conference Board's measure (from a revised 56.5 in December to last month's 46) made mincemeat not only of the consensus prediction of a slight drop to 55. It also served to throw a fresh bucket of ice water on the remaining notions that the alleged recovery in the U.S. is going to get any help at all from Joe Sixpack and Sally Housewife.

In days gone by, such news would have served to cause traders to beat up the U.S. dollar. The implication would have been that -- given a disappointing, if not declining, level of economic activity -- the Federal Reserve would need to keep monetary policy highly accommodative (OK - reckless, if you prefer!) Such would lessen the greenback's allure compared to other choices of currencies.

But today -- and not for the first time recently -- this kind of bad news has caused the dollar to go UP. This is true right now for many reasons: and at the top of the list is the perception that there are NO other choices for investors right now. Among major currencies, the euro is badly damaged goods. The Japanese yen is the currency of a country whose public finances are proportionately even worse than America's. (And, in another commentary I'll be releasing in the next few days, I'll explain why gold is not a viable candidate for most right now, though the day when it IS will also come!)

We also have the continued on-again, off-again unwinding of the carry trade fueled -- in an especially big way last year -- by the U.S. dollar. I have continued to observe that a great many investors (especially a lot of you die hard gold bugs out there) just don't "get" this dynamic. As I have told my readers repeatedly, you MUST not forget that last year's steady decline in the greenback's value came about because investors saw GOOD TIMES dead ahead. Thus, many deemed it both safe and profitable to borrow cheap dollars and use them to buy all manner of so-called risk assets. Those bets on economic growth, however, are increasingly being revealed as too risky (if not plain WRONG), given all the troubles with sovereign debt issues and the growing prospect of a new recessionary "dip."

So it is now this BAD NEWS -- even in the U.S. -- that is fueling the seeming contradiction of investors taking "refuge" (gag!) anew today in the dollar. Appropriately, all the various risk assets are being sold off to one degree or another.

In the upcoming regular monthly issue of The National Investor, I will be discussing all of the reasons why I firmly believe that this cyclical move higher for the U.S. dollar is still much closer to its beginning than to its end. Consequently, I also address in particular how much air may yet come out of commodity prices; not only due to the unwinding of the carry trade, but because of the growing influence that China will be asserting in these markets.

For present purposes, be aware that the U.S. Dollar Index's recent consolidation (which I described for subscribers a couple weeks back) has developed much as I expected it would, and MAY NOW BE OVER. If it is -- and the greenback is on the cusp of another "leg" higher -- new damage will be done to most other asset classes.



Chris Temple

Author: Chris Temple

Chris Temple, Editor
The National Investor

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