Thursday, September 13, 2007

Finally A Dollar Bull

It seems the whole world is bearish on the dollar. I don't worry about short or intermediate term moves in currency but as this cycle comes to a close, I believe the dollar will likely strengthen against most global currencies. It's not a position I am wedded to but unlike the crowd, I see no compelling fundamental argument for a sell off. In the long run fundamentals do matter for those who were beginning to wonder. I haven't read any commentary from someone bearish on equities yet bullish on the dollar as I am so I guess I'm odd man out. But, today the head of currency strategies at Calyon in London gives a counter argument as to why he believes the dollar will likely strengthen over time.

If for no other reason, let me give you something to think about. Every asset in the world is highly correlated and rising this cycle. There are very few exceptions. One is the dollar. As a value investor, (the most successful investing approach over a long time horizon) one should always give analysis and thought to buying what everyone hates and selling what everyone loves. If there is one asset that is universally hated, it would have to be the dollar. Simple enough. People are too conditioned to expect the dollar to fall without actually thinking. Most likely reason is recent precedence. The dollar fell precipitously when the Fed cut rates in 2001. Because it was correlated with rate cuts, there seems to be an almost universal belief that rate cuts always lead to a weaker dollar. In other words, lower interest rates leads to easier money which leads to inflation which leads to lower buying power for the dollar. Those articles of faith can be true at certain times but I would argue there are many times when such a broad statement is not the most important fundamental factor. As an example, what if lower rates means lower inflation, tighter money and higher purchasing power for the dollar?

Update Friday September 14th: I was asked a question as to what this means for gold. I am still neutral to bearish on gold as I commented a month or so ago. But, there is a scenario no one is talking about that might unfold. Could the dollar stabilize or rise yet gold continue to move significantly higher? Possibly. While that may seem counter intuitive, a scenario could unfold where the dollar strengthens against other currencies yet the value of all currencies falls in real terms. In other words, an attempt to relieve imbalances via monetary creation by global central bankers could lead to an oversupply of currency and some unknown loss of intrinsic value of most or all currencies versus gold. Do I expect this? Not at this point in time. But, we need to monitor events as they unfold as this is not a normal business cycle.
posted by TimingLogic at 10:17 AM

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