The Sick Dollar
Research for Online Investors

by John Dalt

2/25/11

The dollar is trying to get up off the floor after being hammered for the last 45 days. Currency trading is a favorite for many who read the promises of Forex advertisements.  I don’t pretend to know anything about the trading of currencies beyond our experience with ETFs.  SwingTrader subscribers occasionally trade currencies when we feel one currency is undervalued or there is a macro-economic reason to see some appreciation.

We entered a long position in the U.S. dollar on Feb. 7 with the etf UUP.  Our premise was a win could occur four ways.  The U.S. economy could keep improving and the dollar would strengthen.  Our second opportunity was if the stock market pulled back this would traditionally move investors back to fixed term investments, lower interest rates and support the dollar. 

Our third justification for the position was if there were credit problems in the eurozone again, this would drive money back to the U.S. as a “safe-haven.”  Our last opportunity for a stronger dollar would be the Republican led house reducing Federal spending in the continuing resolution.  Any attempt to close the Federal budget deficit gap would be welcome news in the financial markets and the dollar should move higher.

We never anticipated that the Federal Reserve would pull away from QE2 as a driver for a stronger dollar. But, we also didn’t anticipate that other countries would start raising interest rates to quell inflation in their economies.  The last one is what has happened and it has hurt the dollar.

We have had turmoil in the Middle East and the dollar languished.  This was surprising as overseas conflict usually results in a rush to a safe haven. In this case fear drove the price of gold and silver higher not the dollar.  Here is a chart or the USD index.

Yesterday, the Bank of England policymakers voted 5 - 3 to keep interest rates at 0.5%  Martin Weale voted with the minority to raise interest rates.  Andrew Sentance also voted against holding rates steady, he wanted to double interest rates to an “astronomical” 1%.  Britain’s inflation rate is running 4% per year and they know the bank better get in front of it.  The European Central Bank’s president Jean-Claude Trichet has warned his colleagues that they may have to “rebalance our monetary policy stance” as inflation is running above their 2% target at 2.4%

In the last week Sweden raised their interest rates to 1.5%, Chili bumped theirs to 3.5%, Israel is now at 2.5% and Vietnam went for a twofer ending the week at 12 percent.  The U.S.?  We are at 0.0% to 0.25%  China has raised reserve requirements on their banks, earlier this month they upped interest rates to 6.06%.  This was the third interest rate increase in the last year.

The Ben Bernank better listen to the world on this one, the dollar is on life support because of QE2 and a Federal Deficit that borrow over 40 cents out of every dollar Uncle Sugar spends.  The party is still on for stocks but remember…QE2 ends in June.

To the Mailbag:
I liked your pick for the Buy, Sell, Hold position this week.  Ed and I have been watching this company for some time.---paid up subscriber G.C.

John’s reply:  It looks like we are up 10.2% in two days…don’t you love it when a plan comes together?

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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