Dollar Strength Then the Decline Resumes

The dollar’s days are numbered…but there’s going to be a lot of movement both up and down before its ultimate demise.

Pound up…

Euro down…

Aussie pulling back…

Canadian giving way…

Yen losing ground…

October is coming to an end, and we haven’t really seen hide nor hair of any terrifying market moves or monstrous returns to the old days of dollar safety, when anything that even had a scent of risk was spurned as foolhardy investing.

But as of now, the dollar has been tanking and anything that is paying a higher interest rate has been soaring, thanks in part to the hawkish comments and actions by the Reserve Bank of Australia, but mostly due to the boneheaded actions of the United States.

Any way you put it, when a man shows up and says, “Hello! I’m from the government and I’m here to help” — RUN. As fast as you can. RUN.

We are following in the footsteps of Japan. Should this continue, we will have to replace our Stars and Strips with a new flag, ”The Land of the Setting Sun.”

No Happy Ending for the Dollar

We’re now at a 9.8% unemployment rate, and we lost a jaw-dropping 263,000 jobs in September. Now it’s true this isn’t the 700,000 we were losing not so long ago. But it still is not awe-inspiring evidence of a recovery.

The euro’s meteoric rise was on the G-7’s agenda this week. But before we start jumping up and down for joy as the powers that be begin pushing the euro back down (and the dollar up), I must confess that I smell a rat.

The folks at the European Central Bank have not been too worried about the strengthening euro up to this point. That could always change. But for now, they seem to be enjoying this appreciation. For them it acts as a nominal rate increase, which will keep inflation in check should it appear. But don’t get me wrong. Central bankers are men just like us (only often with a lot less common sense). They can get blinders on and only see things a certain way. After all, don’t all humans usually see things the way we want to see them? And this can handicap them when it comes to reading the data — the same way it can handicap us. Should they allow the euro to rise too much and too early, it will crush their budding recovery… much to their surprise and chagrin.

That being said, the dollar is in a bad way. Aside from the sheer size of its GDP, and the fact that historically it has managed to pull its fat out of the fire, I’m not sure what we can look at currently to construct any happy outcome for the dollar. That’s it, plain and simple.

The Dollar Will Be Let Down Gently

But nothing, not even the dollar, falls all at once. Hence all this jawboning about the euro (and yen, while were at it) being too expensive. None of these foreign economies can afford to let the dollar fall too much, too quickly. Thus, if they continue to badmouth the strength of their own currencies, it buoys the dollar and gives them opportunities to get out at a better price. But they can’t dump too much on the market all at once. If investors get wind of that, the big boys will have a harder time getting their target price.

So it seems to me that we should be looking for another return to dollar strength. That would play right into the hands of foreign economies that are looking to quietly unload the dollar. It is also the reason I don’t think we should look for the dollar to go into freefall — it is simply too costly for our trading partners. I believe they will do all they can to allow themselves an exit at a decent price.

No matter what may happen to the dollar’s reserve status in the decades to come, it will retain this status for a long, long time. Thus in this great tug of war between the currencies, there will always come periods when the dollar will be viewed as too cheap, and those who need it for continued trading purposes will not be able to resist the drive to buy it.

No Dollar Strength from This “Recovery”

For our last note, let me reassure you, dollar strengthening will not come as a result of the recovery we are supposedly in.

The stimulus has not performed as promised. A quick look at the figures from last November to the present will reveal it was no panacea:

November ’08: 6.6%
October ’09: 9.8%  (up 50%)

November ’08: $14.3 trillion
2nd quarter ’09: $14.1 trillion (down .25%)

Housing starts
November ’08: 655,000
October ’09: 590,000 (down 10%)

Food stamps participants
November ’08: 31.1 million
July ’09: 35.9 million (up 15%)

Home mortgages underwater
November ’08: 15 million
October ’09: 25 million (up 66%)

November ’08: $450 billion
October ’09: $1.5 trillion (up 300%)

Looking for a Dollar Bounce

Let’s sum up. I am looking for a bounce in the dollar (and I have been since mid- September). I thought that perhaps the fall season might be enough to bring it on. That hasn’t happened. That’s not the same as saying it isn’t in the cards. We are now in the midst of the new equities earnings season. J.P. Morgan produced stellar figures that pumped risk appetite into the market strong and hard. Other corporations may not be able to do as well.

It seems to me that this rally is already on thin ice. At any rate, the dollar will bounce. It will likely end up being a bigger move than most anticipate and it will be fueled by fear and short covering. Then, when the big boys have had enough, the course will be reversed, fundamentals will resume their place, and the dollar will begin its drift toward the nether regions once again.

It is a treacherous pathway before us, but it should yield us some really nice profits if we position ourselves accordingly.

Due to the increased interest in currencies, the NASDAQ now offers an easy way for anyone to play up to ten currencies against each other. Click here to for the full fact sheet on the NASDAQ currency options. So you can do your positioning to take advantage of the coming strength in the dollar…and in the dollar’s ultimate decline.

Bill Jenkins

October 22, 2009

The Daily Reckoning