Many people may be mystified by the recent rally in the U.S. dollar.
However, I’m not. Let me explain.
It’s a fact that we have inferior fundamentals in the United States.
We print too much money. We hold interest rates unusually low for too long. We run up debt on the government level. And it seems like we never really have any serious plan about getting out of that debt.
This is why ever since we came off the gold standard, the dollar has plummeted overall. It went from being backed by something with substance (gold) to being backed by the “full faith” of the government.
Banks know that when you add on tons of debt that your chances of making your payments and repaying the debt are slim-to-none, no matter how well intentioned you are.
Well, if nation was applying for a bank loan and had a credit score test, the nation wouldn’t stand a chance at getting that bank loan.
This is how our foreign creditors look at this, too.
That’s why foreign creditors are gradually backing off dollars and turning to gold, other commodities and foreign currencies. These will all rise over time as the dollar falls.
However, the dollar isn’t falling at this moment. It has rallied overall since December.
But let’s view this rally in context. Since the multiyear trend is downward, this rally is just a “bear market” rally. By that, I mean it’s a bounce upward in an overall downward trend because the larger multiyear slide is still intact and will likely remain that way.
But even bear markets have corrections upward from time to time. Right now is one of those times.
So don’t scratch your head when a bear market doesn’t go down every day or even every month. Bear market rallies can last for months and I’ve even seen one last about a year.
However, overall, the dollar is heading lower and will continue to do so through the years.
The first thing to keep in mind is that this isn’t a new “bull market” in the dollar. It’s a rally in an old bear market.
Secondly, currencies are a relative game. By that I mean it’s the choice of who’s the “ugliest” in the contest. Right now, the euro couldn’t have worse negative sentiment.
Almost every day, we hear about the woes of Greece and Spain and others in the euro zone.
This negative sentiment has traders and investors running from the euro zone and into the dollar as a “less ugly” alternative at the moment.
Even the pound is falling. British officials’ money printing (quantitative easing) program has watered down the pound so much that it continues to fall and head lower almost by the day.
So when the “Big Money” can’t run to Europe, the next stop to consider is the United States.
Now, when the problems in Greece (and Spain, Portugal, Italy, etc.) get fixed, then money will flow back into those regions once again and the dollar will continue its downtrend.
However, for now, the dollar looks a bit “less ugly” than the euro or pound due to the investor sentiment not being quite as pronounced at the moment.
Remember that the Big Money can’t just go anywhere with their investing dollars. They have to go to very deep, liquid markets. So they just can’t go anywhere they’d like.
Therefore, they are forced to park a good bit of that money in the U.S. dollar at the moment.
In addition, the U.S. is clipping along at a better pace right now than Europe. I know it doesn’t feel that way … but relatively speaking, we’re doing better.
To prove this, you can look to the year-over-year gross domestic product, or GDP, numbers (which show the growth of the two nations).
Right now, the U.S. had a year-over-year GDP of 5.9% while Europe’s was 0.1%.
While our U.S. number is a “government induced” number and not driven by consumers at this point … it’s still how the numbers fall.
So, right now, that makes us the “less ugly” one in this “ugly” contest.
Finally, many investors fear that stocks could crash again very soon.
So they are going ahead now and putting money into the things that prosper when stocks tank. That is typically the dollar and the yen … and sometimes U.S. Treasuries (but may not this time around) and gold.
So how long will this temporary dollar rally last?
While I can’t give you a date and time, I can say that it’s likely to last until the debt problems in Europe are fixed. And if stocks correct severely, the dollar would likely rally until the sell-off in stocks finally comes to an end.
Therefore, this rally could last for a few more months or so, very easily.
Now, since you know that this rally is temporary and ultimately the dollar will defer to its long-term fundamentals and fall again, you can use this temporary “dollar strength” to buy things like foreign currencies and gold.
After all, you’re going to be buying these financial assets cheaper when the dollar is stronger. You’ll also be able to buy more of them while the dollar is stronger.
So there’s still never been a better time to start moving some assets out of the U.S. dollar.
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