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Investor Reports

U.S. Dollar Rebound: Inflection Point Turns The Dollar Into A Winner

By , Money Morning •

For most of the past year, anything involving the U.S. dollar has been what traders like to refer to as a "one-way trade."

And with good reason: Over the past year, the U.S. currency has traded in only one direction - down.

Indeed, during the period in question the dollar is down 8.3% against the British pound, 11.65% against the European euro and 14.2% against the Japanese yen. On a year-over-year basis, the biggest gains against the dollar have been notched by the Australian dollar (20%) and the Swiss franc (26.7%).
This freefall by the greenback is part of the reason that gold and silver soared to new records and commodity prices have zoomed during the past year.

But here's the thing: This nosedive by the dollar is ending - with a U-turn that's going to send the U.S. currency into a zooming climb.

Traders refer to this abrupt reversal-of-fortune pattern as an "inflection point."

And those traders recognize this about-face in the U.S. dollar for exactly what it is: A windfall profit opportunity for investors who understand just how to play it.

Anatomy of an "Inflection Point"

Since last June, when it achieved its most recent peak, the U.S. dollar - as measured by the benchmark U.S. Dollar Index (DXY) - plunged more than 14%.
Click here to learn about a stock strategy that could help you recover from any dollar-related destruction done to your wealth since the crash.

The greenback has rallied a bit. But there are much bigger gains to come - the kind of gains associated with a true financial asset "inflection point."

To understand the about-face that we're about to experience, it's important to understand there were essentially five factors that tipped the greenback over into its nose-dive. Those factors included:

With each of these preceding five factors at work, it's little wonder that the United States was essentially debasing its own currency - leaving the leaders of other countries to watch as they scratched their heads in rueful disbelief.

In reality, Wall Street has been able to talk Washington into just about anything it needed - even though most of these schemes robbed Main Street consumers of their middle-class buying power. The obvious debasement of the American currency reached the point internationally that investors wanted to own anything but the U.S. dollar.

The accompanying graphic illustrates how investors have abandoned the dollar as they fled into other asset classes over the past year.
You only have to look at the results for a few seconds to see that the reserve status of the U.S. dollar was being abrogated. It didn't hit the lows it reached during the depths of the global financial crisis but it got darned close.

Now, however, the inflection point is upon us.

Time For a Trend Reversal?

The reality of a "one-way" trade opportunity - which underscores the sharpness of an "inflection point" - is that they persist until they don't. I think of this as the "inflection moment," the point at which investors realize that they've ridden the trade as far as they can, meaning it's time to cash out and book their profits.

This is usually represented by a giant shift in investor sentiment. In the case of the U.S. dollar, it was the monetization of our national debt - to fund the deficit spending of the last two administrations - that destroyed the trust in the U.S. dollar. This single action, once boiled down, has carved off the U.S. dollar's buying power.

But now - with the dollar at a potential inflection point - should the Fed shift away from its currency-debasing policy, this could well prove to be the market bottom. That means the greenback will build on the early rebound move that we've already seen. Markets bottom when selling pressure abates.

At some point, the net selling pressure will abate as sellers run out of ammo, and the market switches to net buying pressure. It doesn't matter if it is FX, commodities, stocks or bonds. At the margin, trading is where real price discovery happens.

You can see the different signs showing up in different places, if you know where to look.

Five Inflection-Point Signals

During my time as a hedge-fund manager, I discovered five indicators that, taken together, provide a pretty reliable signal that a dollar reversal - an inflection point - is at hand.

When viewed individually, these indicators aren't that significant. But when they all shift at once, it's a pretty powerful hint that a new trend is afoot - and that windfall-profit opportunities are there for the taking.

To anticipate a reversal in the current decline of the dollar, you should:

So let's look at each of these five in a bit more detail:

Moves to Make Now

Now that we know what to look for, it's time to talk about how to profit - at least in a general sense. For you to understand what we'll be talking about, you need an overview of the kinds of profit plays we're looking for.

When the U.S. dollar bottoms, you can expect to see commodities pull back in price. You can expect to see margins expand in businesses that consume high levels of raw commodities. International shipping companies should see their profit margins improve.

Investors, companies and governments around the world use U.S. dollars as their "reverse" currency. When the dollar changes direction, it impacts the economy of the whole world. In the near future, having reached this "inflection point," the dollar will change its bias direction. And when it does so, every investment or investment strategy that used to work in the global financial markets, no longer will.

Now is the time to prepare your portfolio for the coming change in bias - the inflection point. You'll be glad that you did.

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