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The US Dollar?? The Great American Green-Back? God help its free-fall. Though Thursday's Q2 GDP #'s was nearly 50% less than the forecast, like clockwork, we did see a knee-jerk reaction in the market where the dollar was initially sold off like no tomorrow but within hours it had come back to where it started the days from...What does this mean? This means 2 things: Either the dollar now has a strong upward momentum and traders are bidding its relative value up OR either the world economy is facing the ripple effect of the US' impending recession and they aren't doing too well either.
Why would anyone want to bid the USD up? Only thing that comes to mind in the present doomsday scenario we face in the US in terms of economic data and grim financial reports, is of traders covering their shorts on the EUR. Any dips and they're getting out of their short positions and stacking up on the long side (as a further rally may be due here). No other reason for a strong USD is plausible anymore.
But, we have to understand that the fundamentals are NOT what drives the FX market. Even if it did, the USD should now have been oversold to its nadirs (Why da F is it still where it is?). Everything in the US is reminiscent of a savings account holder at Indymac Bank trying to get her money out of the bank even if the Fed tries to calm the situation saying the bank would be back in business and there is no need to panic thanks to FDIC insured accounts. The shark-feeding frenzy has begun and the US Dollar has no real Fundamental reasons why it should ever rebound from its slumber. I shall give MY reasons below:
Firstly, Europe and the rest of the world has NOT faced a subprime crisis which has made only the US suffer a recession of a mini Great Depression proportions. Secondly, Europe still looks attractive on holding onto its foreign reserves and attract more of it from abroad thanks to its economic data that is a lot better than the US and the interest rate there is 4.25% (compare that with the US' 2%). That itself should answer why the EUR would defn not go any lower than its current levels. Thirdly, the Iran scenario has not been doing the US economy any good. Anytime that country is on the news, start shorting the USD and reap the profits made within the end of day...This has become a strategy of sorts for most trading vets now. The USD's free-fall began ever since the talks of the Iraq war started in 2003. In July 2002, the USD was 0.88cents per EUR, by June 2008, the USD was $1.60cents per EUR (nearly a 100% free-fall). This in trading terms applying a widely used leverage of 100 (which is the norm) could've meant that for every $1,000 you went long on the USD back in July 2002, your returns would've been $92,000 (minus commissions and holding charges that would amoung to a couple of thousands). Your loss would've been your initial investment only. No wonder we saw all this move into the FX sector by the novice traders who were badly burnt because of bad advice. Fourthly, the US' Balance of Payments (the major force as per economists behind currency devalution/appreciation) is at its historic lowests. We're basically borrowing money from our trading partners to use our basic necessities here now. Isn't that ironic? The US who once saved these Asian dead horses are now being assisted into a wheel-chair by these very dead-beats after its nasty fall. Fifth, the Fed's arrogance in continually printing new money has been getting out of hand. By last year, Congressman Ron Paul warned Ben Bernanke of the deadly effects of the dollar which was in abundant supply and now being produced indiscriminatorily to finance everything from the War in Iraw and Afghanistan to International Aid. He estimated that nearly 1.6 trillion USD was printed at whim last year and this would definitely bring about a weaker USD thanks to the increased supply (also raising hell and inflation along with it). Finally, all the economic data releases of the US have been dismal to no avail: Weaker than expected reports in all sectors: Unemployment's been bad, New Housing Starts has been a fiasco, GDP went down the rocks, CPI numbers have been worse than expected, stocks crashing thanks to the financial mess here...Every sentiment here is bleak. But the good thing for the USD is that the World Economy too is not performing in the same stellar mode that it used it. Nearly all developed countries' major trading partner is the US and a recession here could hurt their Exports and directly affect its employment and manufacturing sector deeply...These nations are the last ones who want to see a weaker USD come about. But this to me is exactly what the Fed has in mind even though they come about on TV with a different stance to pacify the markets from shorting the USD to oblivion by subliminal threats of an intervention like the Bank of Japan does all the time.
Though the author below does have high hopes for a USD rebounding, as per my personal convictions, I do not see that happening anytime soon. Sorry mister, I only agree with your Dollar Frown theories.
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by Jack Crooks Dear Subscriber,
You can never actually know for sure what's going to happen on any given day, in any given market. And it's thinking you do know that can get you into real trouble. Instead, you should think about the markets in terms of probabilities. I believe that is the real key to successful trading. Here's how legendary trader Richard Wyckoff put it ... "Listen to What the Market Is Saying About In other words, you need to be open to information the market is sending you. In short, we have forecasts, time-frames, and reasons, but if the market tells us those things are wrong — we should act. Let me give you a great example from this past Thursday:
In a game of expectations, it seemed as though traders were ready to erase the dollar's latest rally and send it dramatically back to test all-time lows. Turns out, it only took a few hours for the all-out dollar stampede to make a sharp U-turn. In fact, the U.S. dollar index actually finished the session relatively flat from where it stood when the fireworks started.
In my opinion, this demonstrates two important points about the U.S. dollar right now:
Critical to Thursday's whipsaw action was the anticipation of Friday's U.S. jobs report. We know now that jobs declined less than forecast even while unemployment jumped more than forecast in July. The immediate reaction following the better-than-expected news was mostly positive for the greenback. What about the dollar's longer-term prospects? I think we should look past the day-to-day action for that answer ... This Year, the Dollar Is Down — At the beginning of the year, I told you about a concept called the Dollar Smile. That idea offered up three potential scenarios for the greenback. Briefly: 1) The U.S. dollar appreciates on risk. In other words, the buck could ignore its weak fundamentals and rally on a flight to quality. This assumes foreign currencies and investments lose their appeal in the event of a global financial crisis. So far we have not seen this scenario play out. 2) The U.S. dollar appreciates on surprise growth. Clearly, this hasn't happened. Any positive surprises regarding the U.S. economy were few and far between. I ruled out this scenario in January, and I think it's safe to rule it out again. At least for the rest of this year. 3) The U.S. dollar falls as the U.S. economy muddles along. For the most part, this is exactly what has happened since January when I published the Dollar Smile concept here in Money and Markets. Each new month the economy revealed greater disappointment. And the U.S. dollar index has fallen as much as 7.8% since then. Considering the way the dollar has been behaving over the last several weeks, I thought it would be good to go back and think about where we are with the dollar smile. In doing so I decided the environment is far different from the environment back in January. With that in mind, I developed something a tad bit different from the dollar smile; something I think does a better job of offering up potential scenarios for the buck. Let's call it "the dollar frown." Have a look at the following graphic. On top you'll find the Dollar Smile. It's a visual representation of how the dollar behaves based on the three scenarios I just described. On the bottom is the Dollar Frown. It's a representation of the three scenarios I'm about to lay out for you.
Scenario #1 — The U.S. dollar falls on risk. Again, if we look back to analyze the dollar's performance since January, we'll actually find that the buck has done poorly during major bouts of risk aversion. It's no secret the U.S. stock market is having a stinky year. And it's no secret the dollar is following that lead. Just recently we experienced what I call the triple whammy — a flight out of U.S. stocks, U.S. bonds and the U.S. dollar. This points to the possibility that investors are growing increasingly concerned about a potential collapse of the U.S. financial system. This type of risk bodes ill for the buck because capital would flee ALL U.S. assets. Scenario #2 — The U.S. dollar rises as the U.S. economy becomes relatively less bad. For much of the last couple years, the U.S. has been the laughingstock among major global economies. And for longer than that the buck has been sinking lower and lower and lower versus the major currencies. But now analysts, economists and investors are beginning to notice a weakening trend seeping into many developed nations. The secret is already out on the United Kingdom. They're following the path of the U.S. The commodity dollar countries — Canada, Australia, New Zealand — have all had their scares, too. And European countries are now on the economic watch list for fear they're at risk of major collapse. And it doesn't look like they'll be getting off that list any time soon. Bottom line: If the U.S. muddles along while Europe et al start to crater, the dollar can rally as its disadvantage narrows. Scenario #3 — The U.S. dollar falls on doom and gloom. Of course, it doesn't matter so much what's happening in Europe or anywhere else if it pales in comparison to what's happening in the U.S. This scenario is similar to scenario #1, but to me it implies a LENGTHIER dollar decline. Which scenario is most likely right now? I'm leaning toward scenario #2, especially in light of what I saw happen this past Thursday. Best wishes, Jack
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