The Death of the "Dollar Carry Trade"

By maintaining a F ederal F unds rate below the 0.25% level – and injecting $600 billion into the banking system through a second round of quantitative easing – the U.S. Federal Reserve has orchestrated a bubble-like surge in commodity prices, an uptick in global inflation and a historic resurgence in U.S. stock prices.

The low-interest-rate strategy has enabled the U.S. central bank to achieve another important objective – a massive depreciation in the value of the U.S. dollar.

There's only one problem with all these "successes" the Fed has achieved: If the dollar ever rebounds, this elaborate financial structure the central bank has engineered will be exposed for what it really is – a shaky arrangement that will collapse like the house of cards that it is.

The fallout from such a collapse could be widespread and painful – especially for investors who've been riding the so-called "dollar carry trade" to major profits.

There's one way to profit from Gilani's newest prediction. Read on to find out all about it.

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Hidden Inflation: Food Prices Flying Under the Fed's Radar

Soaring food prices have been, perhaps, the most pressing global issue of the past two years – yet the U.S. Federal Reserve has taken a "hear no evil, see no evil, speak no evil" approach to the global crisis.

Instead, the Fed has dutifully maintained its focus on so called "core inflation" in the United States – even as Americans suffer the consequences of the "hidden inflation" the government refuses to account for.

The Federal Reserve excludes food and fuel prices from its preferred gauge of inflation because they are often influenced by erratic weather patterns and political turmoil. That at times has been the case over the past few years.

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The 2011 U.S. Dollar Forecast: Up Vs. the Euro, Down Vs. Everything Else

Will the dollar spend 2011 in the gutter? Our forecast definitively shows that it will. The U.S. economy is still stuck in the depths of a possible double-dip recession. The Federal Reserve is doing its best to devalue America's currency. And foreign economies have so little faith in U.S. "recovery" that they're bypassing the dollar […]

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2011 Investing Strategies: Readers Turn to Silver, Avoid U.S. Dollar in the New Year

After a year of rocky economic recovery and a mixed bag of U.S. data, market strategists are waxing optimistic about the profit prospects in 2011.

"There is still an awful lot of pain out there for sure, but if you get this creeping confidence to accelerate a little bit, it's surprising how fast things can turn," Sandy Lincoln, chief investment strategist at M&I Investment Management, told MarketWatch.

A year plagued by Europe's debt contagion, the May 6 market "flash crash" and constant fears of a double-dip recession caused many investors to keep money parked on the sidelines.

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Obama Tax Deal Sets the Bull Running

U.S. President Barack Obama's tax deal has yet to pass Congress, but the compromise – hatched as an appeasement to Republican opposition – already has had an effect on the currency and stock markets.

What's more is the deal looks as though it could offer a significant impetus for the U.S. economy as we move into 2011.

What has happened in the political arena over the past month has been magnificent theater. I don't believe in coincidences, so we have to try to understand what is being staged.

Consider the following:

Just weeks ago we had the stunning compromise by Irish officials with their new European overlords. Then the Standard & Poor's 500 Index reversed at the well supported 1,175-level and its 50-day average. Then came a positive reaction to a weak jobs report. Then U.S. Federal Reserve Chairman Ben Bernanke went on "60 Minutes" to explain the Fed's monetary program. And finally President Obama went on television to announce his tax compromise.

What's the play? Here's a guess.

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Buy, Sell or Hold: VAALCO Energy Inc. (NYSE: EGY) Will Capitalize on Higher Oil Prices and a Lower Dollar

A commodity bull market is happening everywhere you look lately. While the dollar is dying, you cannot say the same about the stock prices of companies with internationally based commodities production.

The reality that the U.S. Federal Reserve will be monetizing all of the government's funding needs for at least the next year has put the market on edge. The U.S. dollar's status as a reserve currency is in question.

Investors are using this opportunity to shift their holdings towards U.S. companies with strong overseas revenue streams. And there is one such company in the oil sector that has been overlooked by mainstream investors: VAALCO Energy Inc. (NYSE: EGY).

VAALCO is a great example of a U.S.-based company that – through its operations off the coast of Africa – will profit from higher oil prices and the dollar's long-term drop in value.

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Will the G-20 Finally Dump the Dollar as the World's Main Reserve Currency?

The Group of 20 (G-20) is meeting today (Thursday) and tomorrow (Friday) in Seoul, South Korea, and one of the main topics of discussion will be the role of the U.S. dollar in the post-crisis global economy.

Debate over the dollar's role as the world's main reserve currency rose to a fevered pitch in 2008 when the financial crisis, which began in the United States, first roiled global markets.

Emerging markets – particularly China, which holds some $2 trillion of foreign reserves – bemoaned the dollar's decline as it drained their dollar-denominated assets of value. Food and energy prices have climbed to record highs, as have many foreign currencies, further exacerbating the issue.

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Currency War Carries On as G-20 Meeting Fails to Secure Specific Trade Targets

Despite securing an agreement from Group of 20 (G-20) officials to avoid weakening their currencies any further, the Obama administration failed to convince member countries to implement specific guidelines to measure compliance and monitor trade imbalances.

At a meeting last weekend in Gyeongju, South Korea, finance ministers from both developed and emerging economies agreed to try to maintain trade balances at "sustainable levels," which they left to be negotiated at a future date. They were unable to reach consensus on precise targets, as the United States proposed. G-20 members will meet again in Seoul on Nov. 11 and 12.

The G-20 was able to hammer out a deal to get China and the United States – as well as the other G-20 nations – to agree to "refrain from competitive devaluation of currencies," and to let markets set foreign-exchange values. China is widely seen as keeping its currency undervalued to boost its exports, while the United States has been accused of pursuing a weak dollar policy, also to increase its overseas shipments.

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Look to Emerging Markets as the Federal Reserve Diminishes the Dollar

The main thrust of the past two months has been the renewed collapse of the U.S. dollar.

The dollar has been on a one-way elevator ride to the ground floor since August, when U.S. Federal Reserve Chairman Ben S. Bernanke first warned that quantitative easing was on the horizon.

Most recently, the minutes of the Federal Open Market Committee's (FOMC) last meeting telegraphed further monetary stimulus.

"In light of the considerable uncertainty about the current trajectory for the economy, some members saw merit in accumulating further information before reaching a decision about providing additional monetary stimulus," the minutes read. "In addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus. Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee's mandate, they would consider it appropriate to take action soon."

Concerns about inflation being too low almost guarantees additional quantitative easing unless the recovery gets a big shot in the arm before the next meeting in early November.

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Question of the Week: Investors Seek Metals To Soften Blow of Global Currency War

The housing market remains in the dumper. U.S. stocks – despite a rally – are still 22% below their record highs of two years ago. And the "official" unemployment rate remains at a heart-stopping 9.6%.

With their knees almost ready to buckle under such burdens already, how will American consumers respond when clothes, computer accessories and other key consumer staples at their neighborhood Wal-Mart Stores Inc. (NYSE: WMT) undergo an overnight price hike of 30% to 60%?

As the United States aims to increase exports by debasing the dollar, a global currency war is underway that could swallow consumers and investors if they don't prepare for the likelihood of a weaker dollar.

The United States, China, Switzerland, Brazil, South Korea, Australia, Japan have all entered the war, trying to bring down their currencies to boost exports and fuel growth. Countries are vying to win the "race to the bottom," as it's been called by Money Morning Contributing Writer Peter Schiff.

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