Need help on predicting near term future of the dollar

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plantguy90's picture
plantguy90
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Need help on predicting near term future of the dollar

Anything's possible these days and I do like to consider all views before formulating life-changing decisions.  So here is an interesting comment which is quoted below:

"Then again, if the gold price tops $1,700 an ounce and oil again soars toward $120 a barrel, one could envision a scenario where the Fed raises interest rates to one or two percent, just to make a point.

But, when considering what that might do to the nascent economic recovery and when combined with the inability of U.S. central bankers to spot anything resembling an asset bubble in real time, policymakers will probably think better of it and just keep talking about a strong dollar instead of actually doing anything to make it stronger...

What this means for the U.S. dollar is that, about the only thing that will prevent its value from eroding much further in the year ahead - a development that could ignite a currency crisis of monumental proportions - is some sort of a non-currency financial crisis where investors and traders from all around the globe seek safety in the world's most deep and liquid capital markets that are only found in the U.S."

-Tim Iacono, 11/19/2009

OK, very intriguing concept.  This does make some sense, as opposed to talking about waves and practicing Prectology.

Can someone help me in laying out several examples of what a "non-currency financial crisis" could possibly be?  My small brain is having trouble thinking one up.  Or is that an euphemism for "War?"

 

 

JAG's picture
JAG
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Re: Need help on predicting near term future of the dollar

Every financial panic in the last 100 years in the US is a non-currency financial crisis, the crash in 2008 being the best example.

plantguy90's picture
plantguy90
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Re: Need help on predicting near term future of the dollar

OIC.  The den of thieves is eyeballing eash other...  Who will get sacrificed next?  A foreign bank?  Maybe Strabes and his GS call is on the money!!!  Blowing up big banks to buy the FRN some time is a very sick but viable strategy.  Wow...  Suicide bombers have nothing over the banksters, as Max Keiser recently joked.

Gigem77's picture
Gigem77
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Re: Need help on predicting near term future of the dollar

Wikipedia has a few ideas   http://en.wikipedia.org/wiki/Financial_crisis    including stock market crash,  another financial bubble bursting, and sovereign default.  We might add to that war or plague .  Those things could send the dollar and treasuries higher.

But what is the most probable event or series of events?   The U.S. is going to run deficits of immense size,  1.5 to 2 trillion dollars per year,   for the next 7 years. This is not speculation, it is the published plan.  So if you manage money, what is your thoughtful response?   Will you buy dollars and treasuries hoping that fiscal sanity returns, or that war or virus outbreaks temporarily send your investments higher?  Or will you swap dollars for commodities and long term contracts for the delivery of commodities?  Will you sell your long dated treasuries and move your forex reserves to the front end of the yield curve facilitating your quick exit?  

The most likely currency event over the next few months will be the dollar declining from 75 to 72 (using the DXY)  and that will send gold and oil toward your target prices. 

From Doug Noland's excellent weekly read at http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10310  Here at home, there is the consensus view that the weak dollar, “hot money” flows, and the reemergence of Asian and global asset Bubbles are predominantly the problem of Asia and the rest of the non-U.S. world.  From Bill Gross’s latest:  “Raise interest rates with 15 million jobless and 25 million part-time working Americans? All because gold is above $1,100? You must be joking or smoking – something.”

 

docmims's picture
docmims
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Re: Need help on predicting near term future of the dollar

well recently the dollar is rising with gold.  What if the central banks quit shorting gold and shorted other currencies causing a stable dollar with rising gold.  Could they have their cake and eat it too?   I know that is way out of the box.

Gigem77's picture
Gigem77
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Re: Need help on predicting near term future of the dollar

I appreciate someone making a bullish case for the dollar, out of the box or not. ;)   It is significant that gold is running higher without a weaker dollar, even if  it is only for a few days.   Correlations are not perfect.

As long as the fed keeps rates at zero there will be a carry trade.  That will keep downward pressure on the dollar.  No matter how much they verbally intervene,  unless rates rise the dollar is toast.

Central banks quit shorting gold some months ago.  The eurosystem banks did not sell their full quota for the fiscal year ending Sept 30.  Their weekly report can be followed here although the site is down right now:  http://www.ecb.int/press/pr/wfs/2009/html/index.en.html 

The Russians are buying, but sending mixed signals. It sounds like one hand doesn't know what the other is doing. But they are net buyers over the last couple of years. http://goldnews.bullionvault.com/russia_gold_110620094

India bought 200 tonnes from the IMF.  That purchase likely put a floor under gold around the purchase price of 1040.  China is buying their own mining output and they are the #1 gold miner now. 

Even Mauritius bought 2 tonnes from the IMF recently.   http://www.moneycontrol.com/news/economy/mauritius-becomes-latest-nation-to-buy-gold_425517.html

Occasionally we hear news or rumors of  interventions to slow the descent of the dollar,  to try to protect export markets etc .  I think the last one was by the Swiss.  Before that the Koreans and Philipines bought dollars.    The biggest support for the dollar comes from China's dollar peg. I wonder when they will grow tired of the problems that is causing?  That might be the "event" that causes the next financial crisis.     But  the largest central bank on the planet wants a weaker dollar.  Despite what Bernanke says, neither he nor  Geithner can control Congress and he cannot,  indeed dare not raise rates.   So I expect occasional dollar bounces, but nothing that will be sustained.

 

Davos's picture
Davos
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Re: Need help on predicting near term future of the dollar

 If health care continues I'd be surprised if the dollar didn't test and even fall below the 71 level of support.

Erik T.'s picture
Erik T.
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Re: Need help on predicting near term future of the dollar

Based on Obama;s "Austerity" comments on the last day of his China visit, I am convinced that he was taken aside in private by the Chinese officials and told "Look, we're gonna make you an offer you can't refuse: Either shape up with your reckless monetary and fiscal policies, else we as your primary financier are going to start playing hardball".

So that explains the words he spoke about austerity. What remains to be seen is whether he will walk the walk or just talk the talk. I fear the latter. I hate to say it, but I think the U.S. gov't is just arrogant enough to dismiss serious warnings from China with "Oh, they are just bluffing. They would never risk their export business by actually getting tough with us". If that's their inclination, I think they are dead wrong. Living here in Hong Kong I'm getting a much better sense of the Chinese mentality, and if America is assuming the Chinese are "intimidated by American power", they are dead wrong. This is China's century and they know it. They are a force not to be messed with, and I fear that the U.S. government won't be wise enough to figure that out and take it seriously.

I can't decide which way the DX is headed, and for now I'm still short but keeping a close eye on my upside stops. I'm seriously considering a (highly levered, very short term) straddle because I just have a gut feeling it's going to make a big move pretty soon one way or the other. If it's to the upside, equity markets are going to be toast.

Erik

 

Damnthematrix's picture
Damnthematrix
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Re: Need help on predicting near term future of the dollar
It seems the US Dollar and the Yen are moving together,
and the Euro, Sterling and Swiss Franc are together,
and then we are the only ones not at or near a record.
 
 
 
JAG's picture
JAG
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Re: Need help on predicting near term future of the dollar

From John Mauldin's latest letter:

I have been doing a lot of speaking in the last month. In almost every speech, I warn of the significant imbalance in the dollar. I walk to the very end of the stage to help illustrate that the world now has on a massive ABD trade. By that I mean Anything But Dollars. Everyone is now on the same side of the boat. They have borrowed dollars to buy other risk assets, assuming that the dollar, like the yen in the glory days of the yen carry trade, will continue to fall. Dollar bears are everywhere.

Explanations abound for why the dollar is a trash currency. It is Fed policy, or the Obama administration's willingness to run massive deficits, or the trade deficit or our health-care policy or (pick any number of issues). But I wonder.

Global trade collapsed last year and well into this year. Global trade was essentially done in dollars. If global trade is down 20% or more, then there is less need for companies in various countries to hold dollars and more need for local currency because of the crisis. Thus, after a rush to safety in the credit crisis, there is a rational selling of dollars by business.

jm112009image003

Look at the above chart. Notice that the dollar is roughly where it was 20 years ago. And notice the recent jump during the credit crisis. We are not even back to where we were before the crisis.

What happens if world trade picks back up, as it appears to be doing? Admittedly, it is not a robust recovery as yet, but it is rising. That means more need for dollars. And dollars which are being borrowed (and probably leveraged!) on the assumption the dollar will continue to fall.

And I agree that, over time, the case for the dollar is not as good as I would like. But in the meantime, we could have one very vicious dollar rally, which would take equity markets down worldwide, along with other risk assets. Why? Because it would be a major short squeeze.

Barron's just did a survey. It revealed that the bullish sentiment on stocks is quite high and almost everyone hates US treasuries (graph courtesy of David Rosenberg of Gluskin, Sheff)

jm112009image004

Whenever sentiment gets too strong in one way or the other, it is usually setting up the markets for a rally in the despised asset. Mr. Market like to do whatever he can to cause the most pain to the largest number of people.

I am not predicting a near-term crash or imminent precipitous bear, although in this environment anything can happen. I am merely noting that there is an imbalance in the system. The longer this imbalance goes on, the more likely it is that it will end in tears. And the irony is that a recovering world economy could be the catalyst.

The Wild Things? They may be hiding in a portfolio near you. Just food for thought. Stay nimble.

For all you dollar bears out there....when was the last time that the herd was right about the markets? The dollar crisis in 2004-2007? Oil in July 08? Stock market in Fall of 08? Stock market in March of 09? 

If you think this time is any different than those, then.....

 

 

plantguy90's picture
plantguy90
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Joined: Jan 26 2009
Posts: 271
Re: Need help on predicting near term future of the dollar

I like JM's stuff, its a good perspective, thanks.  I would posit that I am not a fund manager; I dont manage mega-piles of money, take nice fees, and try to stay one step ahead of the herd.  I have savings, see erosion, no safety.  I don't short the dollar to look for leveraged opportunities in commodities and foreign bonds.   Savings sit  in 3 groups: no risk, some risk, and risk.  All 3 are under attack in some way or form, some outright, some insidiously.  I have been told prices in most items of need in my business consumption will go upwards at the beginning of the year.  Relatives in a foreign, US friendly country have told me that the banks there will not exchange all 100d notes, only the "new" ones...

 

 

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