The Dollar Looks Ready to Rally

Barron's ^ | 29 April 2008 | By KOPIN TAN

[shrinkermd]

When the Federal Reserve cuts interest rates for a seventh consecutive time this Wednesday, it will begin to wind down a pernicious campaign that has flooded the market with cheap dollars since last summer. At the same time, the whoosh of air from Europe's deflating credit bubble puts new pressure on the European Central Bank to begin cutting borrowing costs in order to goose growth.

The strategy shifts by central banks will drive a greenback comeback against the overpriced euro, turning back the 15% slide that since August has lifted the euro -- to a record $1.60 last week -- even as the dollar continues to struggle against the undervalued currencies of Asia.

Monetary policy isn't the only catalyst for a healthier dollar. "A lot of what has happened since last summer also is emotional, and that can change on a dime," says James Paulsen, Wells Capital Management's chief investment strategist. Among other drivers: mounting evidence that the credit crisis loosening its grip stateside is still tightening across the Atlantic, and a growing belief that the U.S. economy could bottom and rebound before Europe's.

The rehabilitation, ironically, is driven by a weak dollar, which makes bargains of our exports, fills Manhattan's 65,000 hotel rooms with European tourists, and entices foreign giants from Ikea to Toyota to open factories here to exploit our increasingly cheap labor.

Already, the dollar has begun to strengthen against commodity-driven currencies from the Canadian loonie to the South African rand, and odds are it is close to a bottom against the euro, sterling and most developed-world currencies. On top of that, "negatives about the dollar are more fully discounted compared to the potential positives," says Marc Chandler, Brown Brothers Harriman's currency strategist, who expects the euro to pull back to test the $1.40 threshold this year

[AndyJackson]

The dollar is going to rally why? The fed raised interest rates sharply or stopped printing lots more money (same thing)? Imports have dropped sharply? There is a sudden demand to hold dollars? Some folks who hold lots of long positions could liquidate them if they could only find lots of shorts who will throw in the towel? All those shorts who got in in the 83-87 range are now scared and will have to cover before they lose their tails?

If we turned the chart upside down and labeled it with our favorite worthless dotcom everyone here would be telling you to let the momentum run and you would be a fool to bet against the trend. Fundamentals argue against a PE of infinity to nothing. Never stopped the permatouts from pushing something to the upside before.

So what is different about this. The flipside of the dollar falling is everything else rallying. What folks don't like to contemplate is that we have had a free ride for 3 decades and don't produce anything that anyone else wants except agricultural commodities - and that is how you become a third world basket case is by relying upon selling farm produce.

[Toddsterpatriot]

You are, if you've been playing the U$D up, for the last few years.

Who do you know that did that?

[Toddsterpatriot]

The fed raised interest rates sharply or stopped printing lots more money (same thing)?

The Fed has been printing lots more money? Since when?

What folks don't like to contemplate is that we have had a free ride for 3 decades and don't produce anything that anyone else wants except agricultural commodities -

Is that why are exports are at record levels? Only because of agricultural commodities?

[mr_hammer]

“Selling houses for 500k+ to people making 50k-100k with 0% down and optional principal payments for the first few years was never a good idea.”

Agreed, when common sense leaves the building, economic chaos enters.

[Gritty]

Looking at the dollar graph, there is no way I would touch investing in dollars unless I were going short. There is a long running, strong downtrend in place.

Even if the $ somehow managed a rally around 10% to the 78.00 range, that downtrend would still be firmly in place. The Euro and other major currencies are going to have to do a lot of backtracking even to see that big a move.

I do look for a short term rally here, but unless we do something big to help ourselves out - like deciding to massively drill for our own oil - I suspect the downtrend will continue at least to the 69.00 level, at which point the lows might test again. Might. We are really cruising in uncharted territory here...

[groanup]

That’s surely amusing to the few who are convinced that mockery is proof of their own superior intellect.

There is enough inferior intellect on these financial threads that one doesn't need a superior intellect to win the debate.

[Zebra]

Not to agree or disagree - but are you aware that the for most financial companies (MS, LEH, GS, etc) these level III assets are greater than their entire capitalization?

Yes. By definition, Level 3 Assets are assets for which there is almost no observable market, either because no market existed or because previously liquid markets have become illiquid (i.e., no buyers). These include some mortgage backed securities, securitized credit card obligations, LBO debt which has not been placed, certain asset-backed commercial paper (where the market has dried up), certain credit default swaps (where trading has slowed), and, of course, hedging and other derivatives such as interest rate and currency swaps.

The overwhelming majority of these assets perform and will continue to perform. My guess is that only that portion of the Level 3 Assets that include tranches of subprime mortgages will pose major problems. I will bet that holders have been writing these down.

FAS 157 provides for the accounting treatment and as best I can tell, compliance is being audited by the independent auditors of the holders (like Merrill, Citi, Lehman, Morgan Stanley, etc.). This is a check on the "mark-to-model" b.s. that FAS 157 permits.

The worry isn't so much default as it is illiquidity. The holders of illiquid assets need access to borrowing or functional trading markets to maintain assets and rebalance portfolios. Better transparency on the balance sheet for these assets (and the basis for value changes) and healthy, functioning credit markets will improve things.

[AndyJackson]

The Fed has been printing lots more money? Since when?

I love you Todd. You are so dense as to bugger all belief. LOL!

For anyone else who wants to see the Fed in action, here it is short term money equivalents, according to the economists of the Federal reserve bank themselves.

Now the only question is do you believe Toddster or the Federal Reserve bank as to whether or not they have been creating lots and lots and lots of liquidity. Seems to me they even had a couple of published votes of the Federal Reserve Board stating that that is exactly what they were going to do. But Baghdad Todd will tell you to move along. Nothing to see.

What do you call that 2 Trillion blip up on the tail of the cart from oh about the middle of 2007 through to the present moment?

[Toddsterpatriot]

MZM shows just the money that the Fed has been printing like crazy? You're funny.

I just had a CD mature. My MZM just took a big jump. I blame the Fed and their printing press. LOL!

Now the only question is do you believe Toddster or the Federal Reserve bank as to whether or not they have been creating lots and lots and lots of liquidity.

According to this , the Fed's balance sheet jumped about $18.6 billion (about 2.2%) in the last 12 months. Wow! That averages about $1.55 billion a month. Less than $52 million a day. In a $14 trillion economy. How will we survive?

Even Federal Reserve notes, net of FR Bank holdings only rose by $5.2 billion (less than 1%) over the last year. Try again? LOL!

[Toddsterpatriot]

What do you call that 2 Trillion blip up on the tail of the cart from oh about the middle of 2007 through to the present moment?

That would be more people holding more short term cash. LOL!

[RightWhale]

housing prices are still going down in most areas of the country

Not here. Fairbanks. We tend to lag the latest crazes and fashions by a while.

[M. Espinola]

"Is that why are exports are at record levels? Only because of agricultural commodities? "

Which aspect of American exports are you involved?

[M. Espinola]

What you said about the Euro is true. As you say, time will tell if the trend will reverse, or get stuck in a sideways mode for a while.

With crude oil still traded in U$Ds, with the exception of OPEC's #2 exporter Iran, which could quickly instigate oil skyrocketing from current price levels, by triggering regional war.

Euro rangebound against dollar ahead of Fed meeting

"Traders are reluctant to be exposed to shorting the US currency ahead of Wednesday's ... decision, which may signal the Fed's intention to pause its eight-month-long easing campaign," said Ashraf Laidi at CMC Markets."

Dollar Little Changed Against Euro Before Fed Decides on Rate>

[ovrtaxt]

Incidentally, my favorite trading system put me into a 96 pip (.0096) trade tonight— the dollar gaining on the euro. I also have the dollar gaining 69 pips on the Swissie and a 75 pip gain on the yen. It’s a pretty reliable system, I win well over 75% of these trades.

Mind you, these trades typically take a day or three to hit profit, so in the big picture it’s pretty much useless for long term analysis.

[Toddsterpatriot]

None. You?

[groanup]

I took money out of a mutual fund and put it into my checking account. Come to think of it, that's what has happened to a few billion mutual fund dollars since mid '07. Let's see:

11/07 stock funds posted an outflow of 10.89 billion

1/08 stock funds posted an outflow of 44 billion.

2/08 stock funds posted an outflow of 9.5 billion.

Just think of the bloated money stock on these.

[Candor7]

My investment counsellor in Montreal with Scotia Bank has the same analysis that you do, Consequently we sold Exxon, and bought solid financials at bargain prices.

The only question is how will the US dollar do? I have a lot of Canadian Currency now 7 cents down on the USD, and I wonder if now is the time to reconvert to USD.

[Zebra]

I am not a currency trader or “expert” on the causes of currency price movements. With that disclaimer, I have to believe that there is tremendous pressure on the Euro and Canadian Dollar vis-a-vis the United States Dollar. If I were a betting man on currency futures, I would be long USD.

[Toddsterpatriot]

Poor Andy. He reminds me of this guy.

[AndyJackson]

That would be more people holding more short term cash. LOL!

Bzzzz. Thanks for playing. Talk about question begging! LOL! HAHAHAH!!