|
|
By
late 2009, as the U.S. dollar flirted with multi-year lows against most
foreign currencies, big investment players crowded into trades that shorted
the greenback. Commentators noted that the anti-dollar momentum had
taken on a life of its own and that the trade had become too crowded.
It is true that markets have a nasty tendency to move against the
crowd. When a lot of traders agree on a particular trade, it's
more likely that in the short-run the opposite trade will be a winner.
The 2008 "flight to safety" rally of the U.S. dollar was a once in
a lifetime event that presented huge opportunities for aggressive currency
traders. By December 2008, after rallying 25% over the previous five months,
the dollar topped out. However, there were many speculators who had come
somewhat late to the party, as well as many others who had ridden the dollar
up and were thus sitting on huge unrealized gains.
Those technical reasons, combined with the re-emergence of strong growth in
emerging markets and solid earnings from overseas companies, redirected
investment flows away from the dollar. 2009 became a year of dollar weakness,
with the buck giving back nearly all of its gains. At that point, most people
made the reasonable conclusion that the decline would continue.
As is often the case, an unforeseen event came along that made mincemeat out
of the consensus' well-conceived strategy. Once some fiscal squabbling
grabbed headlines in the eurozone, the negative sentiment that had built up
on the dollar was suddenly diverted to the euro. Catalyzed by the Greek debt
crisis, the greenback surged by about 8% in six weeks.
From a technical standpoint, the short dollar trade of late 2009 was too
crowded; but from a fundamental standpoint, I don't think it was crowded
enough. As with stocks, there can be no long-term substitute to examining a
government's fundamentals to determine its currency's worth. Based on the fundamentals,
far too many investors remain far too confident about the greenback's
underlying viability.
In fact, I do not think I have ever seen so rapid a change in sentiment in my
career. The crowd had completely switched sides, with most now betting on
the demise of the euro rather than the dollar. This is looking like
July 2008 all over again, with the dollar poised to put in over-sized gains.
It also presents a good opportunity for those who keep their heads.
In my opinion, the market is now perfectly positioned for a massive dollar
sell-off. The fundamentals for the dollar in 2010 are so much worse than they
were in 2008 that it is hard to imagine a reason for people to keep buying
once a modicum of political and monetary stability can be restored in Europe.
In fact, the euro has recently stabilized.
My gut is that the dollar sell-off will be sharp and swift. Once the dollar
decisively breaks below last year's lows, many of the traders who jumped ship
in the recent rally will look to re-establish their positions. This will
accelerate the dollar's descent and refocus everyone's attention back on the
financial train-wreck unfolding in the United States.
Any doubts about the future of the U.S. dollar should be laid to rest by
today's announcement that San Francisco Federal Reserve President Janet
Yellen has been nominated to be Vice Chair of the Fed's Board of Governors,
and thereby a voter on the interest rate-setting, seven-member Open Markets
Committee. Ms. Yellen has earned a reputation for being one of the biggest
inflation doves among the Fed's top players.
Looking for an ally to paper over the administration's gaping fiscal holes,
it is not surprising that president Obama made this selection. Yellen has
consistently downplayed the dangers of inflation and has made statements that
indicate she views the Fed as an extension of the Labor Department, rather
than a guardian of our currency. Last month, in discussing what she saw as
the Fed's obligation to promote employment, she said, "If it were
possible to take interest rates into negative territory, I would be voting
for that." She may very well make Chairman Bernanke look like a tightwad
by comparison.
It is anyone's guess which sparks will be responsible for igniting the
falling dollar powder keg. From a trader's perspective, a sharp reversal
in the dollar will catch many investors completely off guard. Those who
stepped off the short-dollar train will be stuck on the platform as it speeds
away. Those who refused to give up their seats are in for a hell of a
ride.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the
tenuous position of the American economy, the housing and mortgage markets,
and U.S. dollar denominated investments, read my new book : The Little Book of Bull Moves in Bear Markets" (Wiley,
2008).
More importantly take action to
protect your wealth and preserve your purchasing power before it’s too
late. Protect your wealth and preserve your purchasing power before
it’s too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free
research report on the powerful case for investing in foreign equities
available at www.researchreportone.com
, and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
|
|
