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The Dollar Will Crumble Again, Be Ready

By Sean Hyman   |   Wednesday, 15 Apr 2009 04:12 PM

This past year, the dollar could do no wrong. It has soared as almost every asset around the world crashed. So why in the world would that start to change?

Let's take a look at the main things that I see buffeting the dollar.

Firstly, the risk appetite is slowly returning to all markets. Fear and volatility gauges like the VIX, Libor rates, and the TED spread have calmed down. When risk aversion was the flavor of the day, the dollar flourished. However, if markets calm down and regain their sanity, as they are starting to do even now, then the dollar will take the back seat to higher interest-yielding currencies.

Then there's GM's bankruptcy. If General Motors goes bankrupt, and it looks like they will, then there is going to be a lack of confidence in the U.S. dollar.

GM is an American icon. If it goes into bankruptcy, it doesn't bode well for the dollar, even though the company will eventually re-emerge.

On top of all of that we have friction with China. One thing I can say about George W. Bush is that he had sense enough to get Hank Paulson as his Treasury Secretary. Paulson knew how to deal with the Chinese. So far, no one in the Obama administration seems to have a clue.

Normally, China buys our U.S. Treasuries like clockwork each month. However, in January and February, they were net sellers of our bonds.

Speaking of China, they have started buying up commodities lately, so commodities have reversed their downtrends. This is not good from the dollar's point of view since the dollar is on the opposite side of the teeter-totter from commodities. As gold, oil, copper, and lumber have stopped falling and consolidated sideways, and some have even gone back into up trends lately, it doesn't bode well for the greenback.

Not only is money flowing back into commodities but it's also flowing into the emerging markets and into their currencies, bonds, and stocks. When investors are willing to start sticking their necks out that far for returns and interest rate yields once again, the last place they will stay is in the U.S. dollar.

Now, there's still one more shoe to drop. It's U.S. Treasuries.

U.S. Treasuries will crumble. While this part may not happen immediately due to the Fed propping it up artificially as it buys them to drive rates down further, every money manager out there knows that this shoe will drop. When it does, the last place you want to be invested is in the U.S. dollar.

This is yet another reason why money has recently run to emerging market currencies and commodity currencies like New Zealand and Australia.

Lastly, there's the technical perspective that the chartists look to.

The dollar index is failing to make new highs. The dollar can't seem to muster up enough strength, technically on the charts, to break into new highs as it has done for the past year or so. This shows that money is already "sneaking out" of the dollar and most investors are oblivious to it. They're waiting for the same song to continue that has been playing for a year or more now. However, the tune is changing and they can't hear it.

With all of these things staring the dollar square in the face now, the tide is turning and the dollar's luck is about to run out once again. This means it's a good time to learn about currencies and how to get into foreign currencies and get away from the dollar.

The exception to this is the yen.

The yen is starting to crumble, too. This will continue as the world finally regains some traction after every central bank in the world has brought the cost of money down to almost zero and has poured bucket loads of money into their economies.

The death cycle that's been in place for the past year and a half globally is about to come to an end in the months ahead and institutional investors want to get positioned for it before the guys on Main Street know all about it.

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SeanHyman
This past year, the dollar could do no wrong. It has soared as almost every asset around the world crashed. So why in the world would that start to change? Let's take a look at the main things that I see buffeting the dollar. Firstly, the risk appetite is slowly returning...
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2009-12-15
 

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