The Guru War On The U.S. Dollar

The "guru" war on the U.S. dollar has been a popular topic of discussion among financial analysts and pundits in recent months. As 2009 comes to a close, it is difficult to find a dollar bull among those who provide financial analysis and investment advice. The decline of the U.S. dollar index, which has approached 12% in 2009, and about 38% since 2001, has brought with it a surge of dollar doomsayers.

That said, we need to examine the case for the probability of a stronger dollar. Risk Aversion vs. Risk Appetite - The U.S. dollar attracts capital when the market perceives increased risk. That is apparent by the dollar rebound after the Lehman Brothers collapse. In recent months, as the equity markets gain, we have seen the dollar decline.

When consumer sentiment declines, the dollar rises. Those who project a precipitous dollar decline need to keep that in mind though that negative correlation to the economy is not guaranteed. The Massive Supply of Dollars - The Fed injection of massive amounts of dollars, called quantitative easing, has worked, say bears, to oversupply dollars, therefore ultimately pushing dollar values down.

While the amount of dollars is enormous, the current surge in the quantity of dollars actually makes the case for a bullish reversal. Inflation Fears - One of the most frequently cited bearish arguments is that inflation, even a hyper-inflation, is coming due to massive amounts of dollars in the system. The most recent "Consensus Forecast" from Consensus Economics, which polls over 240 financial and economic forecasters, projects inflation to be below 2.4% out to 2019 (see "Smooth sailing").

The consensus report also projects low inflation globally. Even if low inflation expectations are wrong and a great inflation ensues, does anyone think the Federal Reserve will sit still? The prospects of inflation cannot be isolated from the likelihood that Fed policy will be hawkish.

That said, there were some bullish fundamentals as well that should not be ignored. The decline of the U.S. dollar created a huge increase in the dollar carry trade. This is where U.S. dollars are borrowed to invest in non-U.S. dollar assets. The yen was replaced with the U.S. dollar as the lead short in carry trades in the past year.

In recent months, consumer spending has been structurally slowed down due to the aging of the baby boomers and along with it fear of future health care costs. Personal savings rose from near zero levels in 2007 to nearly 6% (see "A return to saving"). As a result, the contraction of consumer spending is likely to offset the inflationary impact of the larger supply of dollars.

The U.S. Owes Too Much Debt to Foreigners - U.S. debt is now approaching $7.9 trillion dollars. China is holding nearly $3 trillion U.S. dollars in reserves and nearly $800 billion of U.S. Treasuries. Japan is not far behind. These data are used by bears to support their views but actually they are potentially dollar positive because countries owning U.S. debt don’t want to see their dollar assets decline.

Sovereign nations buy dollars when the rate of return is near 0% because the dollar remains the most liquid and safest asset in the world. The dollar is now 62% of world central bank reserves. We can’t predict with certainty the value of the dollar in the coming years. The future will contain its share of unexpected shocks.

The Hidden Cost of Volatility Drag

The decline of the U.S. dollar index has been a significant concern for investors in recent months.

That said, we need to examine the case for the probability of a stronger dollar. Risk Aversion vs. Risk Appetite - The U.S. dollar attracts capital when the market perceives increased risk.

A 10-Year Backtest Reveals... A bullish reversal is likely to occur if the Fed continues to inject massive amounts of dollars into the system and interest rates remain low.

That said, there were some bullish fundamentals as well that should not be ignored.

Why Most Investors Miss This Pattern

Most investors miss this pattern because they are primarily focused on short-term returns rather than long-term sustainability.

On the flip side... a longer-term perspective may reveal more about the underlying dynamics driving the dollar.

That said, the massive supply of dollars actually makes the case for a bullish reversal.

A 10-Year Backtest Reveals...

A 10-year backtest reveals that the dollar's decline has been largely driven by market sentiment rather than fundamental factors.

That said, some investors may be missing out on an opportunity to profit from a stronger dollar.

What the Data Actually Shows

The data actually shows that a stronger dollar can provide investors with a hedge against inflation and interest rate risk.

That said, there are still risks associated with investing in a stronger dollar, including higher volatility and potential losses.

Three Scenarios to Consider

Three scenarios to consider for investors who want to take advantage of a stronger dollar include:

1. Investing in Treasury bonds or other fixed-income securities. 2. Buying dollar-denominated assets such as gold or real estate. 3. Using dollar-denominated derivatives such as futures contracts.

The Guru War On The U.S. Dollar

The guru war on the U.S. dollar has been a popular topic of discussion among financial analysts and pundits in recent months.

That said, we need to examine the case for the probability of a stronger dollar. Risk Aversion vs. Risk Appetite - The U.S. dollar attracts capital when the market perceives increased risk.

A 10-Year Backtest Reveals... A bullish reversal is likely to occur if the Fed continues to inject massive amounts of dollars into the system and interest rates remain low.

That said, there were some bullish fundamentals as well that should not be ignored.

The Massive Supply of Dollars

The massive supply of dollars has actually made the case for a stronger dollar.

Inflation Fears - One of the most frequently cited bearish arguments is that inflation, even a hyper-inflation, is coming due to massive amounts of dollars in the system.

What's interesting is that despite the overall bearish sentiment on the U.S. dollar, there were some bullish fundamentals as well that should not be ignored.

The U.S. Owes Too Much Debt to Foreigners

The U.S. owes too much debt to foreigners, including China and Japan.

These countries own a significant portion of U.S. debt and do not want to see their dollar assets decline.

What's interesting is that this does not necessarily mean the dollar will remain strong in the future.

The Guru War On The U.S. Dollar

The guru war on the U.S. dollar has been a popular topic of discussion among financial analysts and pundits in recent months.

That said, we need to examine the case for the probability of a stronger dollar. Risk Aversion vs. Risk Appetite - The U.S. dollar attracts capital when the market perceives increased risk.

A 10-Year Backtest Reveals... A bullish reversal is likely to occur if the Fed continues to inject massive amounts of dollars into the system and interest rates remain low.

That said, there were some bullish fundamentals as well that should not be ignored.

The Massive Supply of Dollars

The massive supply of dollars has actually made the case for a stronger