Strong Dollar
I wrote the following article about the dollar and published it to EzineArticles on August 7, 2009. The Euro was riding high at the time and everyone was bearish on the dollar. Fortunately, I shorted the Euro right around that time frame and made a boat load of money. However, as of this date, I believe the dollar is starting to weaken and it is time to reverse positions. The article as written follows:
The whole market is currently shorting the dollar right now but I think that could be a big mistake. I know this is a completely contrarian view and that the outlook for the dollar is not good. However, I have 5 good questions and 5 good answers as to why I think the dollar is headed for a reversal and that this is the perfect time to go long the dollar.
1. What good is a strong Euro?
I believe a strong Euro will do more damage to Europe than a weak dollar will hurt the U.S. Recently, our weak greenback has been beneficial in two different ways. First by boosting exports and discouraging imports which provides a shot in the arm for our weak economy; not good for the Euro. Second, it helps shrink our trade deposit in goods and services which in turn slows the endless flow of dollars abroad; not good for the Euro.
2. Is there a currency that can replace the dollar as the world’s reserve currency?
To this I have to say… into what? Recently China suggested it would diversify away from the dollar to a likely candidate the Euro. However, the Euro doesn’t have enough liquidity to handle the demand. It is still an experimental currency that not one government can invest in with total faith. Also, with more than two-thirds of foreign reserves in dollars, it would most likely take a decade to replace the dollar as the world’s reserve currency.
3. Is there anyone a weak dollar helps in the long run?
Even though many countries somewhat dislike Americans, they dislike a really weak dollar even more. Why? A weak dollar makes U.S. exports attractive and forces foreigners to patronize that which they despise. Their manufacturing industries suffer and their unemployment rises. So don’t expect foreign governments to fight a modestly stronger dollar or even encourage it when the reversal begins.
4. What about the stock market?
The stock market loves a strong dollar because a weak dollar is NOT beneficial to the stock market. Historically, the average return of the S&P 500 – during times when the dollar was strong – was a gain of 86.6% which is over five times the average return of 16.4% when the dollar was weak.
5. When is the best time to reverse positions in a market?
The best time to take a contrarian position in a market is when the most unlikely and unsophisticated are speculating. Give me a break… when corner store owners and housewives start trying to earn extra income by speculating in Forex, something they know nothing about, we’re near a bottom. The smart money knows that and now you do too. Yes, the dollar will get strong again; at least moderately. In the near term there will probably be more pressure to the downside. However, a turn is coming and when it does the change will come swiftly!
What is your feeling of where the dollar is headed?
I think the US dollar must appreciate in the long term. Unfortunately I think it is going to be the very long term.