Yet Another Strike Against The U.S. Dollar

During 2008, one of the few financial instruments in the world that went up was the U.S. dollar. It became a great defensive play as investors ran back to the “world’s reserve currency”. Also, investors began to flee the emerging markets and repatriated their funds back into the U.S. which caused them to sell out of the foreign currencies and repurchase dollars.

Also, as stocks and commodities plummeted throughout the latter part of 2008, investors looked for any “beaten down” safe havens out there that they could run to. The dollar had been sold off for years back to back. So there were very few financial instruments beaten down like this one. (However, the Japanese yen was in the same shape also).

So for a combination of all of these reasons, the dollar was “propped up” during 2008.

However, the tide is beginning to turn against the buck once again for a couple of reasons.

Firstly, the Fed has finally beaten most other countries in their race to a zero interest rate policy (as it lowered to a “range” of 0% to 0.25%). Investors like to earn the highest yield possible (with the lowest amount of risk possible) on their investments.

Now that the U.S. dollar is weakening and coming back down AND it also carries a lower interest rate than before, it has further caused money to “flee” the greenback in search of “greener pastures”. Therefore, lately, money has been running away from the buck and back into “select” foreign currencies.

The Middle East prepares a plan to “rid itself” of the need for the U.S. dollar!

So that was the first strike against the dollar. Now for the most recent strike against the dollar.

For many years now, the Arab nations have been considering “de-linking” their currencies from the U.S. dollar and forming their own version of the euro.

However, up until now, it’s been just a lot of hot air to say the least. Every year they mentioned the thought of going to a single currency and that’s about as far as it gets.

Well as of yesterday, the Gulf Arab leaders came together and stated that they WILL put together a single currency for their region to use and de-link their pegs to the U.S. dollar.

They state that this will happen by 2010. That’s the part I disagree with. I think it will take them far more time to do this than they think at this point. It took Europe far longer to bring about the euro and I don’t think these guys can be much faster.

However, as far as the greenback is concerned, the negative sentiment has just deepened. Just knowing that these guys are preparing a plan right now to get rid of their peg to the U.S. dollar is all the excuse many investors will need to dump their dollars ahead of time.

Now there is more of an allure for other major foreign currencies once again due to this facet (among others).

Couple this with the recent stabilization of commodities that trade opposite the dollar (such as gold) and it gets even worse for the greenback.

So I don’t think you’re going to see the dollar repeat its success that it found in 2008. The dynamics that made it go up in 2008 are starting to erode way rather quickly.

Therefore, I believe that you will find the euro and the Aussie dollars to be some of the biggest beneficiaries of the coming “dollar selling.”

The Euro Has Begun Its Ascent!

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Comment by hughvw

2009-01-02 08:49:54

Being short the Euro now (via DRR) is a no brainer. As recession bites harder the Euro will have no choice but to go towards zero interest like the Pound and the dollar. As for an Arab reserve currency…good luck with getting the world to buy into that.

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Comment by Sean Hyman

2009-01-02 13:02:19

No, I don’t think they will ever be a reserve currency. There’s a big difference in them using one currency for themselves and it taking the spot as a reserve currency.

The dollar still holds that spot.

However, the diminishing of fear in stocks and commodities as they’ve stabilized goes in the favor of the euro and against the defensive play of the dollar. Thus that’s why the downtrend on that EUR/USD chart has been broken. Oh it will have its pull back along the way, but overall the euro will head higher vs. the dollar in 2009.

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Comment by Sean Hyman

2009-01-02 13:03:29

Also, thank you for taking the time to read and comment on my post. I appreciate that a lot whether we agree or disagree, thanks for reading my posts.

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Comment by hughvw

2009-01-02 16:08:37

Thanks I enjoyed your post and I feel you are probably correct in the longer term. My reasoning is that, if the ECB keeps the Euro at the current interest level, Italy and Greece will have to quit and devalue on their own, or collapse. A partial break-up can’t be good for the health of the Euro, hence inevitable rate cuts.

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Comment by Sean Hyman

2009-01-02 16:53:12

I agree that there are “points of strain” within the Euro Zone that could eventually unravel things.

For instance, if Germany needs a rate hike, …heck, another smaller country could need a rate cut…yet they are all going to get a “hike across the board” because of the Monetary Union.

So I do agree that this puts strains upon other countries within the union that they all may not be able to hold up under at some point in time.

And the euro’s run has been fo fierce lately, that it could pull back once again before making its next advance. We’ll see.

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