Time To Go Long The Dollar?
Regular readers know I’ve been pretty pessimistic on the outlook of the US economy and bearish on the US dollar as well. However, since it seems like everyone is echoing the same sentiment, could it be that we’re due for a short (or medium) term spike in the US Dollar?
According to Lou Basenese, editor of the The Alpha Intelligence Alert, think it’s time to go long the USD.
Here are some of the reasons he cites:
1. Bernanke & Paulson Rediscover “Verbal Intervention.” Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.
2. The “Smart Money” is Cashing In. The smart money – Wall Street institutions – tends to be a great leading indicator. If you can figure out what they’re doing in time. Right now they’re sending a clear signal – take profits on your bearish dollar bets. Case in point, as the dollar met heavy selling on May 21, the smart money took almost $100 million in profits out of Currency Shares Euro Trust (NYSE: FXE). Enough to top the Wall Street Journal’s “Selling on Strength” screen. And this isn’t the first time the ETF recently made the list. All told, the increased selling activity indicates the smart money fears we may never see such high prices again.
3. George Soros Changed His Mind. Even the smartest investors are entitled to a mulligan. After bouncing roughly 3% off the March lows, in recent weeks, George Soros told the Wall Street Journal he is now “neutral” on the dollar. And expects it to strengthen over the next 12 to 18 months. Accordingly, he “greatly reduced his bets against the greenback.” Bottom line – we should pay attention when this hedge-fund phenom changes his mind. Here’s why, copied and pasted from my first article in defense of the dollar…
“A trader named Jean-Manuel Rozan once spent an entire afternoon arguing about the stock market with George Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed.”
“Two years later, Rozan ran into Soros at a tennis tournament. ‘Do you remember our conversation?’ Rozan asked. ‘I recall it very well,’ Soros replied. ‘I changed my mind, and made an absolute fortune.’”
My guess is he will make a fortune on this change of heart, too.
4. The Fed is Done. Okay. Maybe one more cut looms on the horizon. But after that, it’s time to get back to fighting inflation and hiking rates. Futures traders awoke to this same reality once revised GDP numbers were released May 29. They ratcheted up their bets that the Fed would raise rates in late October, putting the odds at 88%. Before the release, odds of an October hike stood at 70%. As I said last time, the Fed will hike again. Soon. And such moves will immediately strengthen the dollar.
5. Busted Rhymes and Tattered Clothing. The crickets are chirping among the rappers and super models. It’s been a long time since we’ve heard (even rumors) about the world’s fashionistas and rhyme-slingers extolling the virtues of the euro over the dollar. In other words, when pop-culture embraced the dollar hating, it signaled the inflection point. And it’s time for them to get caught on the wrong side of the trade for such foolish speculation.6. The Retail Investor is (Blindly) Headed for the Slaughter. Sad as it may be, the retail investor tends to always show up late to the profit party. Right now they’re headed to the slaughter. The proof – the number and popularity of currency ETFs literally exploded in recent years. As one long-time advisor told an IndexUniverse.com reporter, “I’ve never seen this much interest in currency ETFs before…There’s just a pile of money coming into these funds now.” And that pile, according to my research, sits around $4 billion, despite most of the ETFs being less than two years old. This reminds me of my days back at Morgan Stanley. Whenever management decided to launch our own Small Cap Growth Fund for example, because the asset class was so “hot,” the asset class was too hot. It was time to recommend our clients take profits. And now that betting against the dollar is fashionable on Main Street, it’s time we head the other direction or risk getting burned like the rest of the performance chasers.
7. New President = Clean Slate. Whether Barrack “Haven’t-Been-to-Iraq-In-A-While” Obama or John “I-Have-Anger-Issues” McCain gets the nod, a new president will get a clean slate to establish their very own dollar policy. At least temporarily. And thanks to record crude prices, expect the new Commander-in-chief to move from the current administration’s weak lip service to more meaningful actions in support of the dollar.
8. We’re Still Not Decoupled. At least not from Europe. Doubts about euro-zone growth continue to pop up. The latest – a weaker than expected composite purchasing managers index reading, compiled by the Royal Bank of Scotland and NTC Economics. The measure from across the 15-nation euro-zone slumped to 51.1 in May, the worst in nearly five years. Bottom line – the European Central Bank is in a pinch. It can’t hike rates in the face of a slowdown. And it can’t cut rates with inflation running around 3.5%. In the end, the stalemate buys the dollar time to narrow the interest rate gap.
9. Institutions are Secretly Hedging their Bets. It’s not news that international stock funds significantly outperformed U.S.-focused funds over the last seven years. Or that the dollar decline aided their outperformance. However, few realize these very same funds are now protecting their portfolios against a dollar rally. Three of the top money managers in the business (Harris Associates, Dodge & Cox and Henderson Global Investors) are now hedging up to 55% of their currency exposure. A big jump, considering the international funds from Henderson and Dodge & Cox never hedged their exposure since opening in 2001.
And last but not Least…10. The Dollar Decline is Getting Too Long in the Tooth. As I said before, “the cyclicality of the markets instructs us that the pendulum will eventually swing back the other way.” Combine that with Einstein’s theory of relativity and one thing is clear: Although the “real” value of our flat currency may never recover, its relative value certainly will. And with the worst of the financial crisis probably behind us, I stand by my conviction. The worst of the dollar weakness is behind us, too.
Consider this my second warning that the dollar will rise. And soon. That makes now perhaps the last opportunity to position your portfolios for maximum gain.
Good investing,
Lou Basenese
If you do feel like going long, Rydex Strengthening Dollar 2x Strategy (RYSBX) is a good way to enter this trade.
If the dollar does strengthen, there’s a good chance my commodity investments (includes gold and oil stocks) and foreign currency ETFs will decline. I might use RYSBX to hedge against the rising dollar.
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June 5th, 2008 at 8:12 pm
very informative post!
Another way to work this is to go with DUG – an ultrashort oil and gas ETF with lower fees than RYSBX
June 5th, 2008 at 10:45 pm
I hold the opposite view. If Ben is desperate enough to verbally prop up the dollar, USD fundmentals are deteriorating. Look at the current account deficit, money supply, inflation, balance of trade, etc. before declaring that the worst is over.
Also, 4B in currency ETFs? Is he joking? Does he realize that forex is measured in trillions?
The only thing propping up the USD is China, holding 1.7T of US debt, and as soon as they stop buying, the game is over.
June 6th, 2008 at 5:25 am
Great info. Thanks for sharing.
June 7th, 2008 at 12:52 am
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June 9th, 2008 at 10:43 am
A few points:
1. Very surprising that Soros has “changed his mind.” I guess he does this alot though – he could change it back again.
2. I agree that the new president – well, if the new president is Obama – is a wild card. Obama could have a different dollar policy, but so far Obama doesn’t seem to understand why things like economic protectionism can’t work. There will be positive changes if Ron Paul works with the president, though.
3. All the lip service to the “stronger” dollar is great, but if M3 is continually on the increase, does it really matter what is “said” about the dollar? The dollar is being deflated. Check out the conversation between Bernanke and Paul on YouTube… Bernanke is one shifty character.
June 25th, 2008 at 1:45 pm
It’s not going to happen. The dollar is too weak to rally. The fed is only trying to talk up the dollar, but they probably aren’t going to do anything. The dollar will probably remain weak until they raise the interest rates above inflation – which is more likely 6-8%. This is unlikely for several years as the adminstration and fed will try everything else before they realize they have to drastically raise interest rates. In the process, the dollar may lose 40-50% of its value over the next 3-5 years. Hold on to your gold.