Recall, in late March I predicted
here the dollar was overdue for a rally. Ninety-six percent of you cursed me. The other 4% pocketed an easy 20% or so (more if you played the options market).
But after such a swift run - mind you similar moves in currencies typically take years, not months - is the dollar rally finally coming unhinged?
Legendary investor Jim Rogers seems to think so…
As he told Bloomberg News in a TV interview, he plans to exit his dollar holdings because he thinks the dollar "will go down a lot" and it is "going to lose its status as the world's reserve currency."
To which I simply respond, "Into what Jimbo?"
No other choice for a reserve currency exists. No matter how much other governments wish it were so.
The euro is frequently mentioned. But it's depreciating in value. And there's not enough liquidity to handle the demand. Plus, it's still a prepubescent, experimental currency, not one governments can invest in with 100% faith.
Moreover, with two-thirds of foreign reserves already in dollars, it would take more than eight years to replace the dollar as the currency of choice.
So once again, I'm striking out on my own. (And I'm ready for the flood of fan e-mails.) While many pundits would like you to believe that the dollar rally will be short-lived, I completely disagree.
The dollar's not done.
Today I offer up three more reasons why. And of course, three ways to play it…
Too Far, Too Fast? Hardly…
Keep in mind, currency rallies tend to be measured in years and months. Not weeks and days. In fact, according to
Bespoke Investment Group, the average dollar rally lasts 489 calendar days. The longest rally on record lasted roughly 10 years.
While I don't think we're in store for a historic run this time, I do think the current rally has more legs (about another year based on the averages out of Bespoke).
Aside from no alternative world reserve currency, here are three more fundamentals in
defense of the dollar:
Further Interest Rate Cuts
Foreign governments bought into the farce that was decoupling. As a result, they remained hawkish for way too long, keeping interest rates too high, at a time when they should have been cutting them to stimulate growth. And now they're scrambling to catch up. They must make growth their first priority. So further interest rates cuts are inevitable, narrowing the gap with U.S. interest rates. And before long, perhaps the middle of 2009, we could be raising rates while other countries are still lowering.
Continued Deleveraging
As Mark Astley, CEO of
Millennium Global Investments, a U.K.-based currency manager notes, "there is a pyramid of leverage" in the financial markets that will take considerable time to unwind. The half-frozen credit markets are only slowing down the process. As they thaw out completely, expect hedge funds and foreign banks to keep buying up dollars.
Uncertainty Reigns
Despite a new president, uncertainty remains in the markets. Or as
UniCredit wrote in a recent research note, "We do not expect global recession fears to wane considerably." And during times of fear and risk aversion, the dollar tends to outperform.
Bottom line, the current rally has plenty of room to run. If you dare to be contrarian, here's how I recommend you play it…
Consider Pure Plays
For a pure play on the U.S. dollar - without trading the currency markets - I recommend the
PowerShares DB US Dollar Bullish Fund (
AMEX: UUP). It's designed to replicate the performance of being long the greenback against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
Another strong choice is the
EverBank* DollarBull CD. Available in 3-, 6-, 9- and 12-month terms, it offers potential appreciation in the U.S. dollar against a selected foreign currency. If you opt for the latter, I recommend going long the U.S. dollar versus the euro.
Take Profits on Unhedged Multinationals
Consider taking profits in multinationals with significant foreign currency exposure. I say that because the rapidly
strengthening dollar will dent future earnings in two major ways. First, because profits earned abroad will be worth less, as they're translated back into dollars. Second, because demand for the company's products will drop off, as they will be more expensive to foreign buyers. We're already seeing this double-whammy hurt third-quarter results for some big multinationals. But if the dollar holds its ground, or strengthens further, the impact will be much more dramatic in the fourth quarter. So get out while you're ahead.
Buy American
While the dollar was plummeting it made sense to buy companies with significant international sales. They provided a nice currency hedge. However, a strong dollar means we need to reverse course and seek out companies with zero (or minimal) international revenues. I'd stick to solid companies in the utility, health care and consumer staples industries, as demand will remain steady no matter how long the recession lasts.
In the end, I know my dollar stance is
contrarian. Or as many of you put it last time, "ignorant" and "completely out of touch."
I'd add "profitable" to that list now. And I don't expect this time to be any different.
Good investing,
Lou Basenese
*Disclaimer: The publisher of
Investment U maintains a marketing relationship with EverBank, but it's important to note that we'd recommend their products and services anyway.
The 11th Annual Investment U Conference
March 25-28, 2009 St. Petersburg, FL - The Renaissance Vinoy Resort
The 11th Annual Investment U Conference couldn't be coming at a more important time. The markets are in a tailspin, industry titans are on the ropes and we're seeing a major changeover in political leadership.
It's the perfect time to sit down with the experts at our St. Petersburg conference.
More than two-dozen top-shelf analysts,
Alexander Green and
Louis Basenese included, will be on hand to sort out the wreckage… and give you their No. 1 ideas designed for protecting and rebuilding your portfolio.
The recent carnage on Wall Street has created what CFAs and financial professionals term "distressed" situations - a chance for smart investors to deploy some capital at a unique moment in time. But as we've seen the markets churning up and down, you have to be careful.
So in addition to various "preservation of capital" strategies, you'll get some select opportunities to pocket handsome gains, should you be willing to buy in a time of fear… when everyone else is stumbling down the fire escape.
The early bird discount is still in effect, but hurry - it only lasts until the end of December. To register now, and get a list of presenters, just
visit the website. Recall, in late March I predicted
here the dollar was overdue for a rally. Ninety-six percent of you cursed me. The other 4% pocketed an easy 20% or so (more if you played the options market).
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