The US Dollar - Then and Now

Dollar up, gold down. There’s something we haven’t written for a while. An ounce of our favorite metal dipped another $7 yesterday after falling $13 on Monday. It was the fourth straight session gold was in the red. Meanwhile everyone’s favorite whipping currency, the greenback, consolidated gains won earlier in the week after sluggish consumer confidence data eroded risk appetite.

One day does not a trend make, dear reader, but it does us give pause for thought. What if we dollar bears are wrong about the greenback’s fate? What if all these column inches spent bashing the buck – and the frauds at the Fed in charge of protecting it – all come to naught?

“Nonsense!” we say.

Mankind will eventually bury the greenback in the cold, hard ground, alongside every fiat currency that ever went before it. The only question, it seems to us, is when the first shovel of dirt will be thrown. Traders from New York to New Delhi are gathered around the open pit, but they may have to wait, at least for a while. Just to be on the safe side, we’ve bought (and urged readers to buy) a golden shovel, but for now we’re content just leaning on it.

Here in the Far East, the dollar is a particularly curious entity. Once upon a time, the mighty greenback was the best show in town, the “must have” ticket for the rocking Asian economies. China, Korea and Japan all amassed gargantuan stockpiles. The three hold about US$4 trillion (with a “T”) in foreign reserves, much of it in US Treasuries. Even Taiwan – an island one-third this size of Tasmania but with a population equal to Australia – has stashed away the equivalent of US$332 billion in foreign reserves.

But that was then. This is now. And now everyone knows what all those dollars – and the men who stand behind them – are really made of…paper and promises, promises and paper. And now that the game is up, everyone is betting on a dollar collapse. But that presents a problem, and an opportunity, in itself…

“Whenever you find yourself on the side of the majority,” Mark Twain once observed, “it is time to pause and reflect.”

Right now, every necktie on television is betting against the dollar. The Powershares DB US Dollar Index Bullish and Bearish Funds – which measure the sentiment for and against the greenback versus a basket of six major currencies – are showing dollar bearishness in the extreme. But what if this “recovery” is not all it’s cracked up to be? What if equity markets suddenly start resembling reality – even for a short while? If risk appetite contracts, even marginally, might we see a rally in short term Treasuries…just like we did last time? And just how quickly will currency traders be able to cover their short dollar positions if such a scenario unfolds?

We don’t know the answers, dear reader. We only observe that the larger the mob, the more likely it is to be galloping in the wrong direction.

So are we dollar bears, or bulls? The answer, dear reader, is both – the former over the long haul…but the latter before then.

Dan Denning, our friend and colleague on our Australian DR desk, puts it thus: “Though we are confirmed US dollar bears, the dollar is looking oversold. Stocks are looking overbought. And frankly the reflation of all asset markets (bonds, stocks, commodities, and real estate) is looking over cooked… Watch out!”

Asian and European markets largely floundered overnight after Wall Street’s lackluster session yesterday.

Here in the Far East, Japan’s Nikkei 225 dipped 1.35% by the close while Hong Kong’s Hang Seng and the Aussie All Ords ended down by 1.85 and 1.45% respectively. China’s CSI index was the only major measure to buck the trend. It finished higher by 0.45%.

Back to the European measures and London’s FTSE, Germany’s DAX and France’s CAC 40 all finished lower by around 1.3% for the day.

In the commodity pits, crude had slipped back a bit last we checked. A barrel of the world’s goo was down about 60 cents to just shy of $79. Gold was hanging on around $1,036 per ounce…but looking a little punch drunk.

Until next time…

Cheers,

Joel Bowman

for The Daily Reckoning