Tags: dollar

The Revenge of the Dollar

By    |   Tuesday, 02 September 2008 12:24 PM EDT

Just when people have almost gotten accustomed to the idea of the dollar falling off the map, things are turning around.

And the bad part is many currency investors haven't made that shift in their own minds, and they are still buying euros and British pounds on every dip.They think it will be like the last few years where any dip can be bought and held, and they will profit.

It reminds me of the days of the Nasdaq bubble. Everyone all the sudden thought they had become a professional trader because they could buy any tech stock that dipped and hold onto it. Then, they'd come out smelling like a rose.

However, the problem is that eventually the party comes to an end. The thing is, most investors don't realize the tide has turned until they've given back all of their profits.

Well, the tide has turned for now at least, in the dollar's favor. And the trend should stay that way for a while.

The buck got a lot of fundamental support this week from the slew of data that came out, most all of which was a dollar-positive.

Let's take a look at a few of the more important pieces of data that came out that many currency investors ignored.

The biggest thing that stands out in my mind was the GDP data. Last quarter GDP came out at 1.9 percent, but this quarter the number came in at a whopping 3.3 percent. Now that's a turnaround. It wasn't that long ago that GDP was negative.

So the economy is growing again despite the host of ongoing problems such as Fannie Mae and Freddie Mac, and the credit and banking crises.

Another important piece of data was the existing home sales number that came out a bit better than expected in July. There were 5 million homes sold this time, up 3.1 percent from June.

So that's a good sign. After all, there are more existing homes in America than new homes. So it's an important indicator to watch.

Then the new home sales data for July followed the lead of existing home sales and turned in a better-than-expected number also that was higher than June's 17-year low number.

Well, some may think the dollar just had a lucky week with its data. But the numbers continued to roll in the dollar's favor almost all week. The unemployment claims for the week were better than expected. The Labor Department said it was the lowest reading since the week of July 19.

Also, the consumer confidence number hit a five-month high in August. So the pullback in oil and other commodity prices has made the consumer feel a bit better about the future. That was another important milestone in the favor of the greenback.

The icing on the cake was when the Federal Open Market Committee minutes came out. They showed that even though the Fed held rates steady at the last meeting, the central bank is considering hiking rates in the future.

Now that's a pivotal shift. Formerly the Fed had only seriously considered a hold on rates since the economy was in such a sensitive spot (particularly in the housing market).

So, now avvy currency investors know that rate hikes are likely coming in 2009 and they know that the European Central Bank and Bank of England will likely cut interest rates in 2009. The smart money is shorting the euro and pound against the dollar.

However, the retail speculator still hasn't woken up and smelled the coffee yet. They're looking for the euro to knock out 1.60 again and for the pound to come roaring back up above 2.00.

They are doing this out of habit and are ignoring the handwriting on the wall that the fundamentals warn of. Some have fallen in love with the euro and pound so much that they are blinded and don't acknowledge the change in the data.

It's important for currency investors to watch the data for changes in the fundamental trends, because these are what cause the trend changes on the charts.

Instead they just look at the charts alone and only see what they want to see. They see that, overall, the euro and pound have taken the dollar behind the woodshed for years in a row, and they always bet that things will never change. But one thing is for certain about markets: They always change.

Don't get me wrong. The dollar has had such enormous gains lately against both the euro and the pound that it's bound to have a pullback at some point. That pullback could be quite sizable. However, after the correction is over, expect the dollar rally to continue.

Now, I don't expect every number to come out in the dollar's favor. However, the fundamentals of the U.S. have barely stayed alive for quite some time now, and for the first time in a long time, we're starting to see some life in the economy that many haven't picked up on yet.

So expect 2009 to really confuse a lot of investors and leave them scratching their heads as the dollar gains on the euro and pound and gets its revenge.

Very few people see the dollar rising because they've now been conditioned to it falling. So it's really going to come as a shock to their emotions, as well as to their account balances in their currency accounts, when they finally realize what has happened.

You see, the United States went into an economic slump before the euro zone did, and now you're going to see the U.S. pull out of the slump and back into an economic expansion long before Europe does.

This is a big factor that a lot of currency investors aren't considering, and it's the one that will come back to bite them.

So be forewarned, the dollar will have its day in the sun for much of the remainder of 2008 and likely most all of 2009, to the shock of currency investors around the world.

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Just when people have almost gotten accustomed to the idea of the dollar falling off the map, things are turning around. And the bad part is many currency investors haven't made that shift in their own minds, and they are still buying euros and British pounds on every...
Tuesday, 02 September 2008 12:24 PM
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