Dollar, in Perspective

Monday, October 19, 2009

I am currently short the US dollar coupled with the long GLD trade we have been working for months now. I continue to hear other traders talk of how the US dollar has already been pummeled and how shorting the dollar is a crowded trade. I think this talk is nonsense.

Clearly, I do not know what the dollar will do tomorrow or where it will be next week. There is always a chance it could bounce but the dollar can still fall a long way before we claim it is beyond reason. Let us take a look at a chart for some perspective.

Before the massive government capital outlays and guarantees seen in October last year and the final cutting of interest rates to zero percent, the dollar was trading lower than today! In March of last year, the dollar index saw an all-time low of 70.70. Today, the index is trading approximately 6% higher around 75.

Essentially, prior to the Federal Reserve offering no incentive to lend money to the United States and prior to the government's monetization of the deficit spending, the dollar was trading lower. It seems to me that it stands to reason that this debasement of our currency on an unprecedented level would logically place the value at new lows relative to last year. The flight to quality amid last year's September and October panic was misplaced and investors are realizing that the dollar is no safe-haven; the US government does not have its creditors interests at heart.

The trade is not overdone; there is much more downside possible, and probable.


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