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If the Dollar Loses in 2009, Who Wins?

By    |   Monday, 29 December 2008 05:16 PM

The past year has been a period of deflation. The U.S. and global economy have slowed dramatically and thus corporate expansion has come to a halt as consumer spending dried up.

The Fed didn’t sit idly by. No, they do what they feel they do best, which is print money. It’s a great tactic short term to get things going, normally, but usually a bad mistake longer term for the economy.

I say “normally” because when the Fed pumps money into the economy and gives banks access to more money and lower interest rates, they normally pass along the money and the low rates to the public and to corporations, which need the money to expand and grow.

However, the banks have been beaten black-and-blue this year in the real estate meltdown and the credit crunch. Therefore, the banks have gone from being overly generous with the handing out of money to overly tight with the money.

Just as the markets have gone through extreme swings, so have the banks in their lending habits. Since they perceive more risk now, banks keep rates higher to compensate for that risk even though the Fed has reduced interest rates to a range of 0 percent to 0.25 percent (effectively zero).

The Fed has given the banks more money, but they are hoarding the cash to repair their balance sheets and to act defensively in tough economic times.

All of this has brought on a bout of deflation such as we have not seen in a while.

Deflation is the worst. Oh, it seems fine when you see the costs of things going down. But you also have to realize that the unemployment rate goes up and there are less jobs and less money to even buy those cheaper goods. So, in the end, people aren’t better off in a deflationary environment. They are actually better off in a mildly inflationary environment.

This is where the Fed is attempting to get the economy back to. However, with the extreme amounts of money that they’ve had to pump into the country and with effectively zero interest rates, once the banks do start to loosen their grip on the money, it’s going to unleash an inflationary wave.

When this happens, the “bond bubble” in Treasuries will pop as money floods out and back into stocks and commodities. So the cost of goods will go back up, stocks will finally recover, and so will the economy.

Also, the dollar will be debased even more as the flood of dollars into the economy dilutes its value and further pushes up hard assets like commodities, which tend to trade opposite of the U.S. buck.

Since the dollar will be going down, many foreign currencies will rise up against it by default. It’s like a teeter-totter. If one side goes down the other side is going up.

So, let’s talk about what’s going to go up in 2009 and why.

The euro will be the first currency to head higher as the dollar plummets. Remember, it’s often called the “anti-dollar.” It has that name because is it the next most-liquid currency in the world after the greenback.

Therefore, when money starts to flow out of the dollar, it typically heads first to the euro. This will be the main reason for the euro going up, since otherwise Europe is in very bad shape, too, and its recession is hurting it badly as well.

The defensive play of the dollar will be gone in 2009 since rates have dropped to rock bottom. Even if other countries lower rates too, the dollar has beaten them all in the race to zero! As a result, money would rather be anywhere but in the U.S. dollar.

Also, I feel that there’s a good chance that the yen will lose out as well against most other foreign currencies. It will lose its defensive luster as both stocks and commodities stabilize in 2009. Securities could trade in a wide, volatile range in 2009, but just the fact that stocks and commodities stop sliding off the map means the yen will lose out.

You see, the yen was the ultimate defensive play as stocks and commodities crashed. However, as those fears settle down, the money also will flow out of the yen.

So, as money flows out of the dollar and the yen, it will go into the euro at first. However, it will likely go into the Aussie dollar, too, as commodities start to stabilize in 2009.

The Australian economy wasn’t hurt quite as bad as many, yet their currency was horribly punished in 2008, along with most all of the others. So the Aussie will likely find a floor around these levels and will gain ground in 2009.

Another plus for Australia is that China is a huge customer of Australia’s commodities. Believe it or not, much of China is not nearly as hurt by the global slowdown as many might think.

Just ask longtime investor Jim Rogers, who lives there now. He’s stated that there are select sectors that have been hit and the overall economy has been taken back a notch for sure. However, it hasn’t been hit nearly as bad as most. Since currencies are a “relative” game, if your country doesn’t get hurt as much as most countries, you’re likely a winner.

Therefore, Australia will be a huge beneficiary in 2009. Other currencies could benefit as well, but these are the major currencies of the world that I see going up as a result of the dollar’s coming slide.

Among minor currencies, I still see Russia’s ruble having trouble as they continue to devalue it and its citizens (along with the rest of the world) lose confidence in it.

Yet I see the Turkish lira benefiting from the calming of the markets. The lira is such a high-yielding currency that when big investors feel that the coast is clear they will run back into this currency, as they are beginning to already.

However, as far as the majors go, look for the U.S. dollar and yen to be the biggest losers and the euro and Aussie dollars to be among the biggest winners for 2009.

Therefore, if you pair up the strongest vs. the weakest, you would want to own EUR/USD, AUD/USD, EUR/JPY, AUD/JPY and short USD/TRY for some of the stronger picks of 2009.

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The past year has been a period of deflation. The U.S. and global economy have slowed dramatically and thus corporate expansion has come to a halt as consumer spending dried up. The Fed didn’t sit idly by. No, they do what they feel they do best, which is print money. It’s...
Monday, 29 December 2008 05:16 PM
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