The bull market in the U.S. dollar is like the Invisible Man.
An important aspect of any bull market is psychology. Bull markets climb a wall of worry, or so they say. This means that the market will continue to climb despite all of the worries surrounding the bull market.
For example, from 1982 to 2000, when the Dow Jones Industrial Average soared from 777 to above 11,000, there were all sorts of worries. Inflation pressures, the collapsed of the Eastern Bloc, the S&L crisis, the Mexican peso crisis, the Long Term Capital collapse.
Throughout all of these crises and collapses, equity prices kept climbing.
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The same goes for downward cycles.
Despite all of the reasons to buy the dollar in recent years — such as the financial crisis of 2008 which caused a flight to the dollar and the euro crisis of 2010 — the dollar has continued on its long-term downward trend.
However, I'm hearing more calls for a dollar rally.
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I hear that the U.S. economy will grow faster in the short term due to the tax cuts of late 2010. Some say that the euro crisis will show its ugly head again. However, with so many calls for a dollar rally, I think this means the dollar will continue on its downward trend. There are just too many people looking for a dollar rally.
In addition, we must remember three points about the dollar at the moment:
• The U.S. is running a near-10 percent of GDP deficit, which is higher than every other Western government in fiscal 2011. Higher than Great Britain. Higher than Spain. Higher than Portugal. Yes, even higher than Greece, if its austerity measures pay off. These deficits are putting the U.S. in danger of losing its reserve-dollar status.
• As George Soros pointed out recently, the euro crisis is all but over with the recent austerity and bailout measures being passed. The crisis this year is in local municipalities and states in the United States. This will put further pressure on the U.S. dollar.
• If the Middle East crisis spreads, oil prices will continue to spike. The U.S. is much more reliant on the automobile and low oil prices than other Western nations. European nations have much better public transportation and train systems. Therefore, higher oil prices will pressure the U.S. more than Europe.
Therefore, other than small rallies upward, I expect that the dollar is going to continue its bear market and continue to move lower against other major world currencies.
About the Author: David Skarica
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