Is it Time to Bet Against the U.S. Dollar?

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The U.S. dollar has been one of the world's strongest currencies in the first part of 2010.

And it's no wonder. The Greek debt crisis continues to threaten Europe's overall health, and could unleash an entirely new contagion on the rest of the global economy. Then there's China, – the engine of world growth during much of the financial crisis – which now appears to face the near-term triple threat of slowing growth, accelerating inflation and workplace unrest. Add in concerns about commodity prices and global debt levels and it's easy to see why currency investors have sought the safe haven of the U.S. dollar.

But is the greenback really the best choice for safety, quality and security?

Currency Market Currents
To me, the dollar is looking more and more like a colossal short that could wind up being one of the biggest moneymakers of the year for traders gutsy enough to take a stand.

Read on to find out why it's time to bet against the dollar… I'll show you the best ways to do it.

From Leader to Laggard?

Given that the dollar soared 11% since the beginning of the year, I'm sure some experts will call me crazy for going against the dollar at this point in history. But here's my thinking:

  • Our $14 trillion fiscal hangover, weaker-dollar policies and increased spending will lead to additional dollar weakness in the immediate term. Longer-term, this is a foregone conclusion: The high debt load relative to U.S. gross domestic product will erode growth – studies prove this – and all the extra money that we've printed will fuel inflation, as always happens..
  • Foreign central bankers – especially China – are actively diversifying away from dollar reserves and dollar-denominated securities. They can't and won't "dump" the dollar in a wholesale manner. But this shift away is nothing less than a long-term decrease in demand for the dollar – and we all know that when demand for an asset declines, so does its value.
  • The Organization of the Petroleum Exporting Countries (OPEC) – and what's left of the non-OPEC nations – are still pressing for non-dollar-denominated oil deals. Expect some of those deals to take place in the wake of the BP PLC (NYSE ADR: BP) Deepwater Horizon disaster, which will bring about major regulatory changes and cause onshore reserves to command a major premium. This group, incidentally, isn't to be dismissed, given that it contains such heavyweights as China, Japan, Russia, most of the Arab nations and, of course, France.
  • If you look at the chart titled "Dour Days For the Dollar?", you can see that appears to be forming a perfect "rising wedge," a technical formation and a bearish signal that frequently precedes rollovers. That's the opposite of a "falling wedge," a bullish signal that presages reversals to the upside.

Dour Days

How to Play the Dollar's Reversal

It's worth noting here that this wager against the U.S. dollar should be viewed for just what it is – a highly speculative trade. This means it's only for aggressive traders.

Keep in mind, too, that the dollar won't shed its reputation as the currency of last resort without a struggle. Negative events abroad could send investors back into the currency for short stretches, making the dollar prone to short, rapid increases in value, despite its highly flawed underpinnings.

Position traders and everyday investors will probably want to wait for confirmation that the dollar's trend is, indeed, reversing. You'll miss out on some returns but that's the way the game is played – you have to act on your convictions or else you're simply another wannabe in this business.

My suggestion is that any speculative trade be limited to 2% of investable capital. That way, if we're wrong and the dollar doesn't cooperate, the risk to your portfolio is minimized.

As for suitable ways to play this dour-dollar prediction, I can think of three:

  1. Go for the Gold: This is so obvious that I'm almost deterred from suggesting it, especially since the yellow metal is once again trading near its all-time highs. Generally speaking, I don't like buying anything at all-time highs, meaning that pullbacks are the key here. I expect $2,000-an-ounce gold within the next couple of years – and possibly sooner – depending on how central bankers choose to deal with the EU and how the U.S. Federal Reserve handles the recovery bailout "exit" strategies it's alluded to in recent months.
  2. Take "The Natural" Approach: By "natural approach," I'm referring, of course, to natural resources. The BP situation – coupled with new drilling restrictions and increasing Third World demand – is going to push the price of oil and other resources much higher. It's not clear which one pulls or pushes lately – the U.S. dollar or oil – but when one moves the other generally heads in the opposite direction immediately. So watch the relationship between the two carefully to spot when this trend gets under way. Be prepared for some volatile trading, though. Silver, gold and other resources can move 5%, 8% and even 10% in a single day.
  3. Cash in on Currency Funds: It used to be that the dollar and the euro were the world currency market's "dynamic duo" – when one went, you could count on trading the other. But I think that relationship is long gone. The money has now shifted across the Atlantic, headed through the U.S. economy, and headed straight for Asia. As a result, instead of shorting the euro, I'm now inclined to short the dollar, while being generally long on the Hong Kong dollar, the Australian dollar and even the Chinese yuan.

Editor's Note: Of course, there is one other way to protect your portfolio from inflation. Gold Dollars. Using a secure transaction from your own computer that takes just minutes, you can convert your dying dollars into U.S. Treasury-approved "gold dollars." Use them as you would regular cash – except as the price of gold goes up, you'll be able to buy more with 1 "gold dollar" than you could with an old George Washington! It's so simple; we'll tell you how to do it for free. Just go here.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Chuck Estridge | June 26, 2010

    So far, money morning has been of benefit.

  2. Joseph Florence | June 26, 2010

    Thanks for your great information and insights into the world markets.
    I am in Canada and most of your recommendations like the Gold Dollars are, naturally, linked to US Government programs. It is often difficult to know how they may apply to Canadian investors.
    Is there any source that is linked to Money Map Press that can translate some of these opportunities for us or, even better, offer similar information as it directly applies to us up here in the north country.
    I have been inclined lately to focus more on Canadian investments since our economy seems to be one of the few that doesn't suck entirely and given that we are so well endowed with resources (specifically gold, silver, lithium, oil, gas and palladium etc) and I don't lose out on the exchange going both ways, it seems a good idea.
    I would appreciate any comments you might be able to offer.
    I would also like to find a good trading platform that offers what you consider to be an acceptable range of analysis tools and does not rob me blind like the Royal Bank; so if it within your 'can dos', would you recommend any to me?
    Thank you.

  3. david wilby | June 26, 2010

    I am a Canadian and I don't think that I can buy Gold Dollars. I would like to but I don't think I is possible for a Canadian who lives in Canada and who doesn't work in the U.S.

  4. rajesh bajaj | June 26, 2010

    interested in gold dollars – how you buy it

  5. Andrzej Jaworski | June 26, 2010

    For too many too late;-)

  6. Gary | June 26, 2010

    Let's hear it.

  7. JOSE MARIA BANDIC | June 26, 2010

    I AGREE 100%

  8. ron | June 26, 2010

    why not be bold & suggest the actual fund that really bets against the buck?????

  9. bernard shipper III | June 26, 2010

    i agree help me beat the market

  10. bernard shipper III | June 26, 2010

    please send the report

  11. Eddy Widjaja | June 26, 2010

    WEAKENING TENDENCY OF RESERVE CURRENCIES TO WEAKEN IN THE LONG TERM.
    ————————————————————————————————————————

    Once a currency is used as an international accepted payment and used by the world central bankers as reserve currency, that currency is doomed to weaken in the long term against other "strong currencies". Witness the US Dollar since WWII. Why ?
    In order to be able to accumulate US dollars to be used as reserve currency in the non-USA (world) the USA have to tolerate to have a balance payment deficit with the "world". And as is welknown fact a balance of payment deficit has a tendency to weaken its currency.

    The Euro also becoming more and more like a reserve currency will definitely have the tendency to weaken against other "hard currencies" like Aussies, Kiwis and don't forget the chinese Yuan , Rubel and Brazilean cruzerios.

    As more other currencies than the USA became reserve currencies, the fall of the US currency will be mitigated, the fall being shared with the other reserve currencies.

    Regards
    Eddy Widjaja,
    Semarang, Indonesia

  12. Jakobus Stam | June 27, 2010

    See my today's email re Ernst & Young

    Best regards
    Jakob

  13. Andrzej Jaworski | June 27, 2010

    If we speak about real world and not made up MATRIX world the only problem in Europe is temporally higher debt costs which will soon return to norm since there are only two options left: either (A) the Euro is finished because it is false construct OR (B) the manipulators are finished once their vision of the world is exposed as false construct.
    The easily verifiable truth is that artificially synchronized EUR/USD with S&P500 blended with news and pseudo-news have being used round the clock as fear index that fools politicians, financial analysts and real money managers. The problems in USA however are real and in contrast to Europe economic growth have always relied on personal debt. Worse, the health care and planned stimulus reforms might make you see treasury numbers spin like on a gas pump. Still worry about debt in Europe? Then look at Italy, they have lived with huge debt for decades because their cars and cloths are stylish, wine is good and their masters were Leonardo da Vinci, Galileo, Fibonacci etc who in turn attended Greek school…
    To sum up it boils down to the dilemma: A or B?

  14. Miriam Sharman | June 27, 2010

    I'm puzzled about KF's position of being strong on the HK dollar when it is tied to the US dollar? To me the money buys much the same.

    Please clarify?

  15. william a schofield | June 27, 2010

    show me.

  16. Ralph Lowry | June 27, 2010

    Love your clever trading approach to the markets. Hang in there!

  17. Peter Shen | June 28, 2010

    Please send me the information about gold dollar.

  18. Ben | June 28, 2010

    The dollar chart is a bit old since the dollar index is now at 85.34 down from a high of over 88.

    Best regards, Ben

  19. Doug Stevens | June 29, 2010

    SAVE YOURSELVES: TERM LIMITS NOW !!!!!!!!!!!!!!!!!!!!!!!!

  20. richard l. watson | June 29, 2010

    how to get the gold dollar ?

  21. Denon | July 8, 2010

    I hope the Canadian dollar becomes the highest dollar then under the Canadaian dollar is U.S dollar.

  22. Pal | July 16, 2010

    It's too late to save the country as it was.. but you can save yourself by getting the 'f' out of this market and into PM. If you have not already done this then I don't know what to tell you…Santa Claus is real and the Easter Bunny visits every year!

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