Wednesday, May 27, 2009

Dump The US Dollar

The mighty US dollar has posted prolific losses against many major currencies that began back in March but have kicked into high gear the past two weeks. This week so far, the dollar has fallen 4% against the British pound reaching a new low for 2009, 3% against the euro and Japanese yen, and also against the Canadian dollar. With major price levels being broken, many banks are reevaluating year end predictions for the euro vs. the dollar to reach $1.50 or higher. Is this going to be the new trend of 2009, dollar's death spiral? Here's some reasons why many say its time to chuck the buck:

1. The US Federal Reserve is printing money faster than you can shake a stick at. It is called quantitative easing and it ain't pretty. It is the US government's last resort to somehow kick start this economy and it is very controversial. The turn in the dollar's rise occurred in March when the US announced it would purchase US treasuries to the tune of $300bn. Since then they continue on the same track, announcing on Wednesday that they will consider additional asset purchases as long as necessary to drag the US out of this economic quagmire. Meanwhile, the dollar will continue to devalue against all major currencies as long as the US continues this policy.

2. Russia has recently made the Euro its reserve currency, over the dollar. Other countries like China and Brazil have been hinting at doing the same. A lack of enthusiasm for the US currency has many global leaders calling for a new reserve currency or a basket of currencies to take over for the dollar.

3. With the recession and slow economic recovery, the Fed cannot raise interest rates. The dollar will likely continue its fall until the US is able to raise interest rates again, which most economists agree will not be able to happen until possibly in 2010. The question remains: how will the dollar's weakness play out against the other major currencies since this is a global economic meltdown, affecting all countries and currencies? Will the dollar be the weakest since, so far, the US has been much more aggressive with its quantitative easing measures?

4. This week investors are beginning to question the dollar's status as a "safe haven", looking to other avenues like gold. On Thursday the price of gold reached $955/oz up $16, and up $25 so far this week. Standard and Poor's rating agency warned the UK of a possible downgrading of its AAA status due to its incredibly high debt to GDP ratio, which it said may near 100%. This caused alarm that the US may be next. Though most agree that the US's debt ratio is nothing compared to that of the UK or of Japan, which is at 110%, still S&P is expecting the US ratio to reach 77% in the coming years.

The dollar has been the instrument of choice the past 8 months, a safe haven for investors, and surprising some at its apparent strength while stocks slid during the crisis. If in fact the dollar has lost its luster, where will investors look when risk aversion returns? For forex trend traders, this is a dream come true. For overseas exporters, not so much. The dollar index reached 80.40 today, 79.00 is the next major support, below that the all time low at 74.60.

Source - The Examiner


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